Lyondell Numbers and Very Weak NGLs Bode Well for Westlake

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Lyondell reported very strong earnings this morning, beating consensus estimates by more than 10%.  The strength of their US olefins and polyolefins business was notable, given that the company has experienced a meaningful delay in restarting its La Porte (Tx) ethylene facility following substantial expansion work, as well as other operating constraints in the quarter.  Other businesses at LYB were strong, but in aggregate not much different to Q1 2014 and the approximate 37% sequential quarterly earnings improvement was focused in the US operations – and helped by a 4% lower share count.  The gains in the US for LYB were largely a function of the natural gas and NGL price movement down from the Q1 weather driven spike.

Estimates for Westlake, which is essentially a pure play US story, anticipate 24% sequential improvement.  To the best of our knowledge Westlake has not suffered any meaningful operational issues in the second quarter and should benefit from the same raw material cost reductions.  On this basis, perhaps Q2 estimates are conservative for WLK.  In its vinyls business Q2 has seen marginally higher values both for PVC and for the chlor-alkali business.  The company did mention an inventory cost headwind for the second quarter, but this could be more than overcome by higher prices and lower costs.

Even if Q2 is not a meaningful earnings beat, WLK should be quite bullish on Q3.  LYB has talked down the quarter a little based on the continued delays to the restart of the La Porte facility.  But LYB’s problems and delays to the restart of the Williams complex in Louisiana have a silver lining for WLK and for LYB.  NGL pricing generally has weakened over the second quarter, but ethane pricing has collapsed in recent weeks because of over-supply – lack of demand from LYB and Williams being part of the problem.  For LYB and WLK, who both operate ethylene plants in the Mid-West we have the added benefit of a reopening of the spread between Texas and Conway pricing for ethane – see chart.

Both LYB and WLK look expensive based on historic average profitability, but neither looks expensive on current earnings, though LYB trades at a 3x multiple discount to WLK today.   We prefer the focus at WLK, the MLP initiative and the move into Europe and would prefer WLK at the margin to LYB today even with the multiple premium.

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