Earnings Call Transcript - CLMT Q4 2022

Operator, Operator

Good morning and welcome to the Calumet Specialty Products Partners, L.P. Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Brad McMurray, Director of Investor Relations at Calumet. Please go ahead.

Brad McMurray, Director of Investor Relations

Good morning. Thank you for joining us today. With me on today's call are Todd Borgmann, CEO; Vince Donargo, CFO; Bruce Fleming, EVP Montana/Renewables and Corporate Development; Scott Obermeier, EVP of Specialty; and Marc Lawn, EVP of Sustainable Products and Strategy. 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. Additionally, a webcast replay of this call will be available on our site within a few hours. Turning to the presentation, on Slide 2 you can find our cautionary statements. I want to 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 our expectations. Also, please note that last week, we launched a municipal bond offering from Montana/Renewables. That process is ongoing, and as such, we may be limited in regard to questions about the bond offering on this call. I'll now pass the call to Todd.

Todd Borgmann, CEO

Thanks, Brad, and welcome to Calumet's year-end 2022 earnings call. 2022 was a breakthrough year for Calumet. As Montana Renewables launched operations and our specialty business led the company to a record-setting full year adjusted EBITDA of $390 million, a new high for Calumet. The successful startup of Montana Renewables was our most recent strategic milestone as targeted production levels were quickly reached and we've operated well ever since. Strategically, our vision has become reality. We now have demonstrated the power of our industry-leading specialty business and have turned a great project into a top-tier renewable diesel business. From this platform, we believe further substantial unitholder value can be delivered. Talking about strategic progress, let's turn to Slide 3. Calumet is a company in the final stages of a strategic transformation, and before we get into the financial details, let's pause and take stock of where we are and why we believe Calumet is particularly well-positioned. Two years ago, we announced how a small, highly leveraged company could use the energy transition to transform itself by converting part of our assets to renewable service. We developed some views that were, at least at the time, contrary to prevailing wisdom. It's worth a few moments to revisit the most consequential of those core axioms as it lays the foundation for what we are today. First, let's talk about decarbonization and the global energy transition. It's always been our thinking that two fundamental, conflicting truths exist. One, the transition is important and it will happen. Two, it will be much more lengthy, complicated, and expensive than popular consensus. The best we've made are consistent with that strategic view and the conventional wisdom seems to be aligning with our thinking. Our view was fundamental to forming our initial design framework. It was when we confirmed that we could retain significant conventional processing capacity and thus 60% of our Great Falls to EBITDA, all while standing up our leading renewables venture that Montana Renewables became a reality. With the consensus expectation that the industry norm going forward will include under-investment in conventional processing, our legacy Great Falls site should continue to generate strong cash flows. At the same time, we're accelerating the development of sustainable products in our specialty business. Over the past year, we've seen rapid growth in our BioMax brand, which is a biodegradable brand that doesn't compromise on the first-rate performance attributes of Royal Purple. We also launched a zero-carbon wax solution called TitanZero and inbound inquiries are accelerating across our specialty offerings as our customers look for sustainable solutions. During today's opening remarks, you heard a new title from Marc Lawn. As Executive Vice President of Sustainable Strategy and Products, Marc will dedicate his energy to accelerating our sustainable offering across our specialty business through partnering and innovating with our unique customer base. Technical customer collaboration is a sweet spot for Calumet and Marc will bring a dedicated executive focus to leveraging Calumet's legacy core capabilities and the renewable product experience we've gained through Montana Renewables to innovate in this fertile area. The second core differentiator to our Montana Renewables strategy was how we thought about the renewable diesel market and margin formation. Our once contentious strong and stable margin theory has now gone mainstream as it has subsequently appeared in competitors' marketing decks from here to Italy. From our view on industry margin formation, the concept of CI parity and the importance of our unique geography was born. At one point, feedstock supply was the most popular pushback we received and it now feels that our competitive advantage to preferentially source feedstock in Montana is widely accepted. The other frequent challenge we would receive in the early days was concerns of already overbuild projects. When we started down this track, it felt like there was an announcement a week, and I don't believe we've seen a new announcement in the U.S. in over a year. It's actually contrary as we've seen projects canceled or stalled due to cost pressures, financing, legal, and permitting challenges. We're seeing that location and feedstock flexibility are lasting advantages in this business and new builds are extremely challenging. The obvious locations have already been announced or converted. Further, with consensus being that traditional fuels refining will be more profitable for longer, the pressure for less advantaged sites to convert has waned. Of course, if the consensus holds, our specialty business is well-positioned to benefit from traditional margins being better for longer as well. The third axiom from Montana Renewables is SAF. As we've discussed in prior calls, we made a decision to invest in SAF prior to the Inflation Reduction Act. At the time, it looked like a niche largely private market, but similar to the overwhelming positive response we received early in the RD marketing stage, SAF was highly sought after and we could sell every job we could make at a margin substantially higher than RD. From there, the IRA was a pleasant surprise and it changed our SAF outlook. The Montana Renewables strategy shifted from serving a niche specialty opportunity to becoming a first mover in a global mega trend. The U.S is positioning itself as a SAF leader and it's fair to say that decarbonization of the rapidly growing aviation market will be a real challenge. It's also the case that SAF is the leader in the aviation decarbonization clubhouse and Montana Renewables is poised to be the largest SAF producer in North America next quarter. With these early views playing out, we retain our strong expectations around Montana Renewables run rate profitability once the feedstock pre-treater is in place next month. We see immediate upside with the scope addition of SAF and we are increasingly optimistic about the opportunity to potentially double Montana Renewables EBITDA through our MAX SAF expansion, which we'll talk more about later. Turning to Slide 4, we shift the lens from strategy to execution. 2022 was the year in which strong execution and a favorable market environment met generating exceptional results. With all the energy we see around Montana Renewables, it's easy to lose track of the transformation that has occurred within our specialties business. 2022 was a record year and strategically could not have happened at a better time as the cash performance of this business allowed us to hold onto MAX equity in Montana Renewables through a time of immense value escalation. The results were fueled by record operations nearly across the board, exceptional commercial execution, and favorable market forces that looked to remain strong in 2023. Our entire organization was nimble through the supply chain disruptions and a highly inflationary environment. In three short years, Calumet's integrated platform has displayed what we mean by advantaged optionality. During COVID, we lowered rates, focused on specialties, and generated positive cash flow. In 2022, we ran MAX rates, occasionally even intentionally maximizing fuel yields, and we set an EBITDA record. Over the same period, our operations teams have also demonstrated their capabilities. In 2021, we lost the majority of the year to winter storm Uri. In December of 2022, we encountered a similar challenge during the week of Christmas nonetheless, but with lessons learned from the year prior and well-placed capital early in the year, the result was different. That storm cost us the last week of the year, which essentially negated all of December's EBITDA, but we still delivered a record fourth quarter and all of our sites are back and fully operating. What a difference a year makes, and I can't thank our teams out of the sites enough for their commitment, skill, and agility over the past few years. At Montana Renewables, an entire business was built and launched in roughly two years. Let's turn to Slide 5 for the current status. As expected, our renewable diesel unit came online in the fourth quarter and has run exceptionally well. Catalyst performance and throughput rates have been as planned as we run up to our hydrogen limit. We took the entire site down in the third quarter and separated into a niche cash flow-generating specialty asphalt refinery, plus a world-class renewable diesel and SAF facility. While these businesses are independent and unique, we operate them as one site with one mission. Delivering this project largely on schedule amid supply chain challenges and a few bouts of intense cold weather has been a gargantuan effort and the team remains on track to deliver the sequential commissioning. Since startup, we've been successfully selling to customers and have fully de-risked our supply chain, which is incredibly important to suppliers in this industry. Our renewable hydrogen plant commenced startup on March 4, and we're ramping up to 12,000 barrels a day. Our pre-treater will be mechanically complete in March and running in April. Lastly, the SAF scope that we added midway through the project will complete startup in April as well and will be the largest SAF producer in North America next quarter. This accomplishment takes the commitment of our project teams and operational teams working together, and we're really proud of the hard work that our tractor team is on. During the second quarter, we expect to achieve our run rate EBITDA, which we have previously guided to be in the mid-250s with growth from there. With that, I'll turn it over to Vince to take you further into segment-level results.

Vincent Donargo, CFO

Thank you, Todd, and good morning. As Todd mentioned, Calumet had an exceptional year as shown on the financial summary table on Slide 6. The strong margin environment and operational performance carried through into the fourth quarter as you can see in both our quarterly and full year results. We exceeded our financial metrics and targets for 2022. Before I take you through the segment, I wanted to highlight our continued focus on the balance sheet. Delevering has been at the heart of Calumet's strategy for many years, and we took a transformational step in 2022. Twelve months ago, our net debt was 10x our trailing 12-month adjusted EBITDA, and by the end of 2022, we improved to 4x. Our delevering mission is not yet complete, but it has progressed meaningfully and we now have a clear path to achieving our goal of gaining access to competitively priced capital. Of course, these marks were achieved while Montana Renewables was under construction, and we expect this new business will essentially double the company's steady state EBITDA output when the pre-treater is up and running. Turning to Slide 8, our specialty products and solutions business generated $95.7 million of adjusted EBITDA in the fourth quarter. While the margin environment for specialties and fuels came off slightly from the record third-quarter level, they continue to be quite strong through the end of the year. The SPS team continued their focus on commercial excellence and the benefits of that focus show in our results. However, the Arctic freeze that hit most of the U.S. in late December did have an adverse, albeit small, impact on our quarterly results as we had to shut down several of our facilities right around year-end. Those plants quickly returned to normal operations and have been running at full capacity to start 2023. For the full year 2022, our SPS business delivered $379 million of adjusted EBITDA. We have continued to see the constructive margin environment early in 2023, and while we do not expect this extremely strong margin environment to remain forever, we do believe that our commercial excellence initiative, reliability improvements, and integration all contribute to an elevated bar that we call the new normal. Moving to Slide 10, our performance brand business generated $2.7 million in adjusted EBITDA for the fourth quarter and $20.1 million for the full year. As I mentioned on the last quarter's call back in November, the fourth quarter is typically the weakest for performance brands and we saw even more seasonal impact this quarter than we typically do as big box retailers focused on inventory control going into year-end. We talk a lot about the benefits of our integrated business model and how tailwinds experienced in SPS can often turn into headwinds for performance brands. This tradeoff is relevant as we produce 20x more specialty products in SPS than we consume in performance brands. However, not all of the anomalies of this business experienced in 2022 are directly offset by SPS. To name a few, the supply chain crisis hit this business more than others in the Calumet portfolio. We worked through a force majeure from our largest additive supplier, which was lifted near year-end. As we have discussed previously, we lost all supply from our largest grease supplier and sourcing alternative grease supply in a tight market has increased our input costs and limited our ability to meet demand in some of our highest growth areas. Lastly, we continue trying to offset this inflationary environment. One example of how inflation is more acute in performance brands is of roughly $17 million of increased can costs over the past two years. This takes time to pass along. Near the end of the year, we saw steel prices revert to some semblance of normalcy and so far in 2023, we have seen big box consumer demand pick up. We are optimistic that the financial results of our performance brand segment will match the strength of its underlying brands as we start to normalize in 2023. Moving to Montana, our business had another busy quarter with the plant turnaround and renewable diesel conversion. We are very pleased that we were able to start the renewable diesel plant and begin to serve our customers so smoothly last quarter. Todd has already discussed our progress on the RD and SAF front in Montana, so let's turn to Slide 12 to discuss the quarter. Fourth quarter adjusted EBITDA of negative $13.1 million was a result of several one-time factors that impacted us throughout the second half of the year. Most significantly, the plant was in turnaround for a significant portion of the fourth quarter. That means there was no crude throughput and no production. We carried a fair amount of inventory over from the third quarter and what turned out to be a falling price environment, so we spent the back half of the quarter processing expensive inventory upon restart of operations. Finally, Great Falls was not immune from the extreme winter weather even by Montana's standards. Temperatures at times fell below minus 30 degrees Fahrenheit, making for impossible working conditions and extremely expensive natural gas. In all, we estimate the impact of these one-time items to have cost us from $40 million to $45 million of adjusted EBITDA in the second half of 2022. Despite these challenges, Montana still delivered $75.9 million of adjusted EBITDA in 2022 and we look forward to 2023 as the legacy specialty asphalt plant is fully operational and Montana Renewables is close to achieving run rate EBITDA with the pre-treater coming online in April. With that, let's flip to Slide 13 and I will turn the call back to Todd for concluding remarks.

Todd Borgmann, CEO

Thanks, Vince. In 2023, we expect to close the turnaround chapter at Calumet for good. We have a few critical near-term items to accomplish that will allow us to enter this next phase of the Calumet story. First and foremost, we must continue to operate safely and reliably. Major steps were taken in 2022 and we expect to continue on this trajectory. Early last year after spending the entire 2021 recovering from winter storm Uri, we commenced a three-year capital plan focused on modernization, reliability, and integration of our Northwest Louisiana assets. We are extremely pleased with the first year of that program and while reliability is a function of a lot more than capital, our specialties business saw a 30% year-over-year volume growth, which was worth well north of $100 million in adjusted EBITDA. We intend to keep the operating improvements to recognize last year and we expect to spend $125 million to $145 million of capital in our legacy business in 2023. We also have a nice portfolio of small to midsize low-risk growth capital that we have not approved, but could pursue as the year develops. As exciting as those opportunities are, all discretionary capital will be evaluated using an extremely high internal hurdle rate as we compare those investments against allocating capital towards the purchase of our own securities in the marketplace. Further, we believe we have room to add differentiated integration without capital as well. Earlier we talked about the new sustainable specialties mission that Marc is leading and Scott will pick our performance brands as we look to leverage each segment's strengths and positioning. We will continue to report SPS and performance brands separately as they are very different businesses, but we'll operate at the single specialty business with one unified vision. Next, we will complete the Montana Renewables pre-treater that we've talked about so frequently. As we've mentioned before, good logistics and access to advantage feed is fundamental to making money in renewable diesel and Montana Renewables is ideally positioned to achieve both with the pre-treater in place. We expect to get that unit stood up shortly, work out any normal kinks and process our remaining clean feed in the next month or so. With that, we expect to be delivering run rate type EBITDA by the middle to the end of the second quarter. Upon completion of the pre-treater, we’ve entered what we believe is an increasingly exciting phase for Montana Renewables. We believe we have a number of game-changing options available to us and like the past couple of years, we'll navigate them to achieve the maximum risk-adjusted return for our unitholders. Let me frame up how we think about our planning case, as it serves as the guidepost from which we try to add value. First, we're well in process with two exciting financing opportunities. The first is the municipal bond offering announced last week. Further, we recently received news that we've been accepted into the second phase of the DOE process. Well, it's no guarantee that we'll ultimately receive the DOE support, progressing into Phase 2 is a major hurdle. A relatively small percent of applicants are able to clear this. We've mentioned the DOE opportunity before and we believe renewable hydrogen, renewable diesel, and SAF are right down the fairway of what this program was developed to support. Next, we expect to work towards an IPO of Montana Renewables at a time when the unique earnings power of the operation is clearly demonstrated and markets are receptive. It's quite possible that before then we turn the high level of strategic interest into an additional minority partner as our entire plan since inception is to partner thoughtfully in ways that deliver unitholder value. We did that roughly six months ago and we couldn't be more pleased with that relationship. We're working with a sharp experienced group of professionals who share a vision for the ultimate potential of Montana Renewables. As always, we remain focused on unitholder value and we'll keep our options open as we look for ways to enhance the base plan. Lastly, it's difficult to talk about the ultimate potential of Montana Renewables without discussing sustainable aviation fuel or what we call MAX SAF. We continue to gain conviction that SAF is a tremendous opportunity with the same or maybe even more geographic advantages that exist in our renewable diesel business. We talk about SAF in different ways. So let me clarify. We have 2,004,000 barrels per day at SAF production coming online in the second quarter, which is a result of the SAF scope adding to the original RD project. MAX SAF is a future potential growth case in which we believe we can expand our existing plant capacity to 18,000 barrels a day of throughput, and then convert approximately 80% of that throughput or 15,000 barrels a day to SAF. As we discussed last quarter, we've already purchased the reactor needed to do the MAX SAF expansion to ensure we can move quickly, should we proceed or bring in a partner who wants to progress aggressively. The reason for the energy around SAF is the combination of the recent Inflation Reduction Act, the enormous potential for the future market size, the current underdeveloped size of supply, and the fact that Montana Renewables is already positioned as an early mover and the largest U.S. supplier in 2023. Some reputable organizations have forecasted a 150 billion gallon SAF market in the next 30 years. To put that in perspective, today's U.S. production is less than 75 million gallons or 0.05%. In MRO and MAX SAF mode could generate more than 200 million gallons annually by itself. These numbers are staggering and obviously extremely aggressive and early. That being said, we're very fortunate to have a front-row seat as an industry leader as this market develops. As soon as our pre-treater is complete, we'll shift our full focus to deeper engineering of this MAX SAF plan, as we expect it to be a major component of a potential IPO, and we'll certainly have additional information on this potential next step as we progress throughout the year. With that operator, we're ready to open up the queue for questions.

Operator, Operator

The first question comes from Roger Reed with Wells Fargo. Please go ahead.

Roger Reed, Analyst

Yes, thanks. Good morning.

Todd Borgmann, CEO

Good morning, Roger.

Roger Reed, Analyst

Yes, just, I guess maybe we could talk real quick about how you see the PTU coming online, and then the reason I'm asking is we've seen a lot of other companies struggle with the whole process. Maybe talk about how it's gone so far, how the PTU fits in and any sort of, let's call them teething pains we might be watching for here over the next 30 to 60 days.

Bruce Fleming, EVP Montana/Renewables and Corporate Development

Hey, Roger, this is Bruce. Good morning. The experience that we've had has been very favorable to date. We've got one step left to take, which is the one you asked about with the PTU. If we just back up a second, we took a facility and we did something kind of novel. Everybody else was shutting down and converting. We kept the crude run live and we converted. So the first project was the logistics separation and that went well. The second project was turning on the renewable diesel unit. That went well. The third project is turning on the renewable hydrogen, which we did about 10 days ago. As Todd indicated, that's going well and that leaves one more step, but at the risk of jinxing this, I have to say, I think we got this. The guys in the field are doing a great job. We benefited from some of the industry experience that you referred to. We addressed any known problems, issues, and opportunities in our design. We added a couple of things late into the design when we heard about some experiences elsewhere. All I can say is we haven't had those misfortunes.

Roger Reed, Analyst

Definitely a positive. But yes, it does seem to be kind of an area of focus. I guess the other question I'd like to follow-up on also is SAF related, going to let's call it the MAX SAF model, as you labeled it. Feedstock-wise is we've talked before about canola oil as a possibility. Would that factor in or are there other feedstocks we should pay attention to? And what's your kind of broad line of sight on being able to supply at 18,000 barrels a day?

Vincent Donargo, CFO

Vince, again, so I'll remind everybody that we sit in the middle of more like 150,000 barrels a day of feedstock supply. So physical availability is never going to be an issue for us. It goes to optimization pretty quickly. We've got 59 point sources of supply. They each have a yield signature in the process and as we tilt the machine to a high SAF percentage, that's going to reorder the preferred feeds. As that happens, real broad brush, animal side feed products are preferred to the vegetable side feed products, a couple exceptions to that. But generally that's one of the reasons why our feedstock supply department is led by an industry veteran trader from the beef tallow side of the street. We don't see any difficulties, Roger. And I'll remind you also that we started up on a 100% tallow. We absolutely overachieved in sourcing on the most preferred feedstock.

Roger Reed, Analyst

It's good to hear. Thanks, guys, and congrats on the quarter.

Todd Borgmann, CEO

Thanks, Roger.

Operator, Operator

The next question comes from Amit Dayal with H.C. Wainwright. Please go ahead.

Amit Dayal, Analyst

Thank you. Good morning, guys. Congrats on the execution so far. With respect to the municipal deal, could you give us any color on the use of proceeds from that financing?

Vincent Donargo, CFO

Hey, Amit, it's Vince. Thanks for the question. The financing for Montana Renewables is already in place, so we won't be using this financing for that. We're planning to pay off some obligations that the parent company had set up previously. However, the funds will remain within the designated area. This will also boost spending that is already in progress on our MAX SAF expansion project. Todd mentioned the reactor, which we've discussed before; we acquired it to speed up the timeline, and we've already started the engineering work. We're currently covering those expenses. This funding will support that expansion. In about six months, as the engineering advances, we'll have a clearer estimate of the installed cost. So stay tuned for those updates.

Amit Dayal, Analyst

Okay. Thank you for that. And just one more for me. Could you give us a sense of how many barrels of RD and SAF you may be at by the end of 2023 per day?

Vincent Donargo, CFO

Sure. I'll tell you what we're at right now. We have contracted 2,000 barrels a day at SAF and we’ve contracted 9,000 barrels a day of renewable diesel. That's the current plan. That's approximately 80% of our permitted capacity. So we expect to exceed that. That's one reason why Todd mentioned a range of SAF production from 2,000 ranging up to 4,000. We're pretty economically incentivized to pursue that SAF, and so I expect we will do better than our conservative promise.

Amit Dayal, Analyst

Understood. That's all I had, Vince. Thank you so much.

Operator, Operator

The next question comes from Neil Mehta with Goldman Sachs. Please go ahead.

Neil Mehta, Analyst

Thanks, team. Appreciate the time. I wanted to go to Slide 13 and the year ahead. You provided that '23 CapEx guidance of 125 to 145 million. Can you help us understand the buckets associated with that CapEx and how should we think about what maintenance or sustaining CapEx is on the business?

Todd Borgmann, CEO

Yes, this is Todd, Neil, and thanks for the question. I believe there are mainly two categories. The turnaround category is expected to be around $50 million to $60 million in 2023, while the other category focuses on modernization, reliability, and integration. This group primarily involves maintenance, but there are also returns and benefits from that spending, as we observed last year. Many of these projects are quite similar to those we undertook last year. For instance, we're upgrading our control system in a city, and we are in the midst of a large multi-year control system refresh in Shreveport. We also have tank work planned across the system, with some of that work completed last year, which significantly improved the integration between our plants and network. Additionally, we have a turnaround at Cotton Valley, which will include some reactor enhancements and yield improvements. We still have more work ahead in our utility systems, which are crucial. As I mentioned earlier, I talked about a hundred million, and reflecting on last year's major improvements, the biggest gain came from enhancing the reliability of our utility systems. We intend to keep progressing in that area. As I noted in my prepared remarks, this is part of a three-year plan involving tanks, utilities, and controls, and so far, it's been going well. Another example of maintenance that yields returns, even if it's challenging to assign a specific figure to it, is the upgraded water system in Shreveport. The losses from the city during December and January had the most significant impact; without that issue, we would have seen improvements in just a few days. The same situation occurred a year ago with Uri. We won't allow that to happen again, and we are committed to addressing it. Hopefully, this provides a clearer idea of what we mean by modernization and reliability-focused maintenance. Does that help?

Neil Mehta, Analyst

That helps. As we consider the ongoing capital expenditures, some of these projects appear to be more of a one-time nature, and we're trying to understand what the open free cash flow looks like.

Todd Borgmann, CEO

Yes, we view our long-term run rate as approximately $80 million. We initiated a three-year plan last year, so we expect to see one more year of elevated performance in the range of $120 million to $140 million. After that, I anticipate the run rate will settle around $80 million.

Neil Mehta, Analyst

Got it. Thank you. And then the follow-up is just around capital structure. You've done a terrific job getting your net debt to EBITDA now down to 4x from what was very, very elevated levels during the COVID period. If we're in a more uncertain economic environment and things get a little bit tougher, talk about what the resiliency that you've built into the business and financial model to protect downside, so the outcomes are better than last time.

Todd Borgmann, CEO

Yes, I think in general you can approach it a couple ways with that. In general, we're on record saying we'd like to take an additional $300 million of debt out of the system over the long run. At the same time, we don't feel that is mandatory to survive because remember we have basically an additional 100% improvement addition to our EBITDA stream coming in Montana Renewables. So we think we've got to a point where our leverage is on the high end of the range, but it's within a reasonable go-forward range. I think as you start to see cash flow from operations come in over the long run, we will see that overall debt load decrease to $300 million. I think you can broaden that out and talk about capital allocation as a whole, right. We're really going to just rely on market signals received throughout the year to guide us on there. I think it's a broader sources and uses question and as we look about that potential sources of capital, we have cash flow from ops, which I talked about. We have the muni process, which we're in process with. We have the DOE process, which we mentioned; we have potential equity at Montana Renewables that could be a minority equity sale, it could be an IPO, it could be both, it could be a full takeout. We look at uses, we have debt repurchase, which is the heart of your question. We have equity repurchase, we have MAX SAF CapEx, we have repurchase of the $250 million Stonebriar facility, and we have specialty growth CapEx. So with the capital markets kind of deal live, I guess I probably shouldn't go too much further, but I will say strategically that we do want to continue to lever. That's fundamental to our thesis that hasn't changed. I'll also say the single biggest variable in capital allocation is really the price of Calumet equity. If it remains where it is today when Montana Renewables is at steady state, it's hard to imagine an investment with a higher rate of return. I guess maybe MAX SAF. But we'll be watching that closely. So hopefully that gives a little bit more color to the question and we're actively pursuing capital. We have a bunch of really great ways to deploy it. Right now, we're focused on completing the pre-treater and after that, we're going to look to the market to help us deploy our capital most effectively.

Neil Mehta, Analyst

Great color. Thank you so much, guys.

Operator, Operator

The next question comes from Gregg Brody with Bank of America. Please go ahead.

Gregg Brody, Analyst

Good morning, everyone. When considering the various funding options available at Montana Renewables, I'm interested in whether the anticipated muni deal and possibly the DOE deal will enable you to transfer cash out from that entity. Alternatively, do you believe there will be some cash that needs to be retained for capital expenditures?

Vincent Donargo, CFO

Yes, good question. And I assume you're talking about the 24th, Gregg?

Gregg Brody, Analyst

No, I'm just mentioning that I believe the preferred instrument requires you to maintain cash at that entity. I'm curious if you feel confident in funding everything at MRL, and what potential fundraising are you considering?

Bruce Fleming, EVP Montana/Renewables and Corporate Development

Yes, Gregg, this is Bruce. Maybe I'll start helping with that and flip it back to Todd for the corporate context. So we do not have a structured capital call in the LLC agreement that we have with Warburg Pincus. There is a minimum return requirement, but we've got five years to meet it and it's a low hurdle at an 8% IRR. That was very attractive money, which is one of the reasons we formed that partnership last year. So as we get the opportunity to prune the capital structure at Montana Renewables, we're going to take it. I imagine if you wanted me to handicap it, that’s going to be evolutionary. We are going to see opportunities present themselves, and we're going to consider them and we're going to take advantage of the ones that make sense. Right now, we made a great deal of sense to partner with the state of Montana, use some of their capacity, municipal bond capacity and to take this, what we expect will price next week at an attractive level for us. The Department of Energy is a little further out in time, but that's going to lay in pretty well with what we think is the spin-up on the MAX SAF expansion. We've got this reasonably paired, but we've been pretty successful in adding a lot of shareholder value by staying flexible and not committing to a particular course of action. The reason for that kind of thinking on our side is this is a fast-evolving new industry segment. It's going to be very interesting to see who's picking their way through smarter and who wins. We think we're pretty well set up for that because of our geographic location advantage. So now we just need to keep the momentum and stay ahead of the kind of developer group, if you will.

Todd Borgmann, CEO

And I guess the only thing I'd add is, sources and uses, they’re all a bit variable. As I look at the potential sources in Montana Renewables, I think they are greater than the uses. So it’s quite possible to expect money going up to the partners, to us in Warburg, in certain scenarios. But we don't have a capital call. There's not a specific timeline that we're looking at that says that we have to accomplish something. But of course, as the pre-treater comes online, we expect to be generating a lot of cash flow. And that's either going to go to kind of MAX SAF expansion or for raise additional capital to fund that, or will come to the parent and be used opportunistically.

Gregg Brody, Analyst

Got it. I appreciate you maintaining the flexibility. Do you have a range of how much growth CapEx could be? I know you're weighing other opportunities against that, but I'm curious if you sort of have a line of sight into how big it can be, if you chose to move forward on it?

Todd Borgmann, CEO

At the parent company, Calumet, we could potentially invest between $100 million and $200 million over the next couple of years, targeting returns of over 20%. As I mentioned earlier, this is not a commitment; it remains an option. Given the current market conditions, such an investment may not meet our thresholds based on our available equity. However, I do believe that at some point, we will pursue these growth capital expenditure opportunities we have. It just might not happen this year.

Gregg Brody, Analyst

And you haven't provided in the past, but are you providing capital spend for Montana Renewables for the year?

Bruce Fleming, EVP Montana/Renewables and Corporate Development

It's Bruce again. As you know, we have chosen not to set a spending metric. The goal was to establish the business quickly and effectively, and we believe we have achieved that. I want to address your question about the MAX SAF expansion. We expect to have a clearer understanding of the costs in about six months as we progress in our project management. It's estimated to be in the couple hundred million dollar range, with a lot of uncertainty at this stage, but it's a significant aspect for us. We expect a return on investment of over 100 percent. When Todd mentions evaluating spending opportunities, it is from the perspective of what the capital markets are indicating we should do, whether it's regarding company stock, equity, organic growth, or new growth opportunities that are starting to emerge. There are plenty of options for investing our resources.

Gregg Brody, Analyst

I appreciate all your insights. I have one last question. I think you mentioned that you are working with a smaller group of potential strategic investors for a minority partner. Can you confirm if I understood that correctly? Additionally, does this indicate that there is a near-term timeline for progressing on that front?

Bruce Fleming, EVP Montana/Renewables and Corporate Development

I appreciate the question. Bruce, again. So look, our plan is to maximize shareholder value. At the end of 2022, we turned a lot of options that we've been running into our new base case. That was the Warburg Pincus partnership. We're very satisfied with that as Todd mentioned. In 2023, we want to do that again. We want to do it off of the SAF platform now. That's the thing that is changing for us and that specifically has caused us to revalue upward our sense of the enterprise value of this new MRL business. That’s off of the SAF and it's off of the IRA legislation. It's off of the access that we're developing to appropriately priced capital, mainly in the form of munis and hopefully DOE if we succeed in the Part 2 application there. So our flexible approach has already added a lot of shareholder value. We're not in a hurry. We're not short of people that want to put money into quality businesses like this. So the real selection criteria come down to a partner that makes sense strategically. But if you want to think in terms of a potential significant minority investment by a strategic leading to an IPO, that's consistent with everything we've said. Do we want to put a specific timeline on it? We do not.

Gregg Brody, Analyst

Yes, I know Steve is not tweeting anymore, so I didn't expect you to give me the timeline. Thanks for the time, guys. Appreciate it.

Operator, Operator

The next question comes from Manav Gupta with UBS. Please go ahead.

Manav Gupta, Analyst

Can you help us understand how much RD you produced in the fourth quarter? What was the EBITDA associated with that? I'm trying to determine the EBITDA margin per gallon for benchmarking and to track improvements moving forward. Could you provide details on the EBITDA margin per gallon for the project in the fourth quarter?

Bruce Fleming, EVP Montana/Renewables and Corporate Development

Amit, it's Bruce. Sorry, Manav, apologies for that. The physical production in 4Q was very limited. Mostly we put that into tanks as we built inventory shipments for sale, which began late in December. So it's not going to be meaningful in 4Q. What I'll direct you to is the contracts that we have for selling the renewable diesel are all fully priced on the California formula. In other words, CARB diesel plus blenders tax credit, plus LCFS, plus 1.7x factor. We get a hundred percent of that.

Manav Gupta, Analyst

No worries. Regarding the fourth quarter, I would like to understand the opportunity cost. If there hadn't been disruptions and if the score features hadn't occurred, what would the refining segment's EBITDA likely have been? The margins were impressive in the fourth quarter, and the reported EBITDA of minus 13 doesn't accurately reflect that. I'm trying to grasp if it weren't for the turnarounds and the D3, would you be reporting a significantly higher figure from your refining business?

Bruce Fleming, EVP Montana/Renewables and Corporate Development

Yes, we would. That's the $40 million to $45 million that you should add back.

Manav Gupta, Analyst

Okay. Thank you guys.

Bruce Fleming, EVP Montana/Renewables and Corporate Development

Thanks, Manav.

Operator, Operator

As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Brad McMurray for any closing remarks.

Brad McMurray, Director of Investor Relations

Yes, thanks. On behalf of the management team here and really all at Calumet, we thank you for your time and your interest this morning. Thank you for joining the call. Everyone have a great rest of the week.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.