Westlake – Showing/Giving Us the Money

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WLK has indicated that it will place its US ethylene and pipeline assets into an MLP and has filed a registration statement for an initial public offering of the MLP.  Not surprisingly the stock has reacted very favorably to the news – up almost 15% at its peak today and up 9% at the time of writing.

Our view on both WLK and LYB has been consistent; that while the stocks look expensive on any “normalized framework” they do not look expensive based on current earnings and cash flows.  The risk is that the cash gets spent on an acquisition or series of acquisitions at the top of the market valuations, something the industry has been guilty of in past cycles.

By forming the MLP, Westlake is effectively committing the bulk of the free cash generated by the ethylene and pipeline assets to the shareholder.  Any further investments in ethylene and infrastructure will need to be done through a capital raise from shareholders.

WLK is expected to earn $5.21 this year; if 90% of this is paid out as a dividend, even with today’s appreciation in the stock, you get a 6.7% yield.  This is a little simplistic as not all of Westlake’s assets and earnings will reside in the MLP, but it serves as an illustration of why the stock has done so well on the announcement.

On its quarterly conference call this morning LYB management responded to questions by suggesting that the tax base at LYB – post bankruptcy – makes a similar decision more complicated for LYB.

We would be more interested to see what the possibilities would be at DOW.  Not only because it is likely that DOW has substantial assets that would be appropriate for an MLP, but also because a DOW MLP could then build the ethylene and propylene plants in the US by raising equity rather than by the DOW parent raising debt or reducing share buyback/dividend increases.

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