Alembic Global Advisors

Chemical Industry Reports

US Chemicals: Seeing upside in ethylene exposed names

01/26/15 -

US Chemicals – Seeing upside in ethylene exposed names

  • Ethylene price, cost and margin deep dive suggests consensus overly pessimistic
  • Cycle strength and more importantly feedstock flexibility could offset declines
  • US ethylene exposed names oversold; we rate DOW, LYB and WLK Overweight

Summary

Our analysis which does a deep dive into ethylene pricing, production costs, and margins suggests ethylene margin declines y-o-y in 2015 could be 6-10c/lb versus consensus expectations of 20c/lb. Our bear case pricing scenario assumes the Brent-ethylene price regression holds suggesting prices of 34c/lb, our base case is based on current naphtha based marginal production economics which points to a pricing of 37c/lb, and our bull case assumes current US contract prices of 38c/lb continue through the course of 2015.

If current ethane prices of 17c/gal linger through 2015 that would provide a 4c/lb y-o-y margin tailwind suggesting a bear case y-o-y margin compression of 10c/lb and bull case compression of 6c/lb. From a company perspective this would imply negative 2015 EBITDA revisions of 13-24% for US ethylene exposed names in our bear case scenario versus market implied 30-37% declines.

We further contend that the ethylene cycle tightening, which we expect in the near-to-medium term, could boost margins by as much as 20-25c/lb from current levels. More importantly with propane based ethylene margins now at levels higher than average 2014 ethane based ethylene margins feedstock slate optimization could result in EBITDA at Dow Chemical rising by USD167m y-o-y in 2015, declining by a meager USD115m at LyondellBasell, and declining by USD105m at Westlake Chemical versus market implied expectations of USD2bn in y-o-y EBITDA declines at Dow Chemical and LyondellBasell and USD730m at Westlake Chemical. We believe US ethylene exposed names may be oversold and reiterate our Overweight ratings on DOW, LYB and WLK.

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