Alembic Global Advisors

Chemical Industry Reports

US Chemicals: Recent oil price declines already discounted

10/17/14 -

US Chemicals – Recent oil price declines already discounted

  • Oil related chemical pricing/margin fears and recent share price declines overdone
  • Share price decline already discounting a USD20 per bbl re-rating in oil prices
  • See limited downside and significant upside in DOW, LYB, MEOH, and WLK

Summary

Oil price declines of over 20% in the last three weeks have dragged down US commodity chemical shares by an equivalent amount. We highlight six reasons why we feel the selloff in oil prices and chemical shares and associated fears surrounding US commodity chemical margin compression may be overdone: 1) spot ethylene and methanol prices are down by 12% and 2% respectively during this time period suggesting supply/demand for these products may be tight, 2) the long end of the Brent futures curve is down less than USD2 per bbl, 3) with the exception of Kuwait and Qatar oil prices are now below all OPEC member countries budget break-evens, 4) the crude oil cost curve points to marginal production economics of USD80-100 per bbl, 5) despite a precipitous decline in oil and naphtha prices US ethane based ethylene producers still remain 25c/lb cost advantaged relative to naphtha based ethylene producers, and 6) past history suggests that even in the global recessionary 2008/2009 time period Brent crude oil prices averaged USD79.72 per bbl – near current levels.

Assuming a USD20 per bbl re-rating in oil prices points to a 23-30% reduction in 2015 consensus EBITDA for DOW, LYB, MEOH and WLK – shares for these names are down 21-27% over the last three weeks suggesting this oil price decline has already been factored into valuation. Our analysis further suggests that oil prices would need to fall to USD50 per bbl for companies to reconsider greenfield ammonia and ethylene projects in the US and to USD67 per bbl for reconsidering methanol projects. We reiterate our Overweight ratings on DOW, LYB, MEOH, and WLK.

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