Alembic Global Advisors

Chemical Industry Reports

US Chemicals: Unprecedented times, higher share prices

07/28/14 -

US Chemicals – Unprecedented times, higher share prices

  • Despite rally still see significant upside in US chemical company shares
  • Up-cycle, MLP filing, FCF return, M&A, divestitures and activism all catalysts
  • DOW, LYB, MEOH and WLK stand to benefit the most from these trends

Summary

Despite a multi-year rally in US chemical shares we see six catalysts coming together which may result in significant further upside, from current levels, in the share prices for these companies. These catalysts include: 1) an imminent ethylene up-cycle, 2) value unlocking via dropping assets into an MLP, 3) significant acceleration in free cash flow generation and associated return of cash to shareholders, 4) valuation boosts from M&A, 5) value unlocking via asset divestitures, and 6) shareholder activism related turnarounds.

1) Ethylene up-cycle: A combination of growth projects kicking in and a march towards peak ethylene margins could result in EBITDA at Dow Chemical and LyondellBasell rising by over USD5bn from 2013 levels and at Westlake Chemical by over USD1bn.

2) MLP filings: Dropping certain assets into an MLP and garnering the associated valuation re-rating could significantly benefit the share prices of Celanese (by USD2.9/share), Dow Chemical (by USD4.1 per share), LyondellBasell (by USD32.9/share), Methanex (by USD19.5/share), and Westlake Chemical (by USD10.0 per share). 

3) Free cash flow generation: A move towards a peak would result in free cash flow yields at Dow Chemical, LyondellBasell, Methanex, and Westlake Chemical rising to low-to-mid teen levels.

4) M&A: We see accretive M&A opportunities at LyondellBasell - which could acquire Axiall Corporation or Methanex - and at Tronox which could do an accretive Reverse Morris Trust (RMT) transaction with DuPont’s soon to be spun out Performance Chemicals business.

5) Asset divestitures: Announced divestitures of lower margin and cyclical businesses at Dow Chemical and DuPont could enhance these companies’ earnings and result in a valuation re-rating.

6) Activism: We see activism related turnaround expectations already being baked into Air Products and DuPont’s valuations while still see meaningful upside in Dow Chemical shares.

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