Articles

14.05.2015

Best plays in the US petrochemical sector

Petrochemical industry in the US, in a crisis only a couple of years ago, is currently going through a period of an active resurgence. The shale boom in natural gas production was accompanied by a boost in production of hydrocarbon feedstock such as ethane and propane. As a result, the chemical industry worldwide was shaken up and lead to the loss of competitiveness for European and Asian petrochemical companies.

In 2008, none of the members of the American Chemistry Council (ACC) planned investing in the country. Today, as US petrochemical plants are benefiting from the cheap supplies of natural gas, the ACC lists 110 new investment projects for the US, worth more than $77 billion.

At the dawn of the shale boom, gas drillers were mainly focused on methane gas. However, due to lower margins of methane gas production, they shifted their focus to production of shale oil and the so-called “wet gas” (natural gas that contains the hydrocarbon feedstocks, e.g. butane, propane and ethane). An alternative to “wet gas” is naphtha, a component of oil. Some petrochemical companies, including European, primarily run on naphtha, which is much more expensive than “wet gas”.

In general, petrochemicals are petroleum products refined from crude oil and natural gas. They are mainly used in the production of petrochemical derivatives such as formaldehyde, polyvinyl chloride, acetic acid and epoxy resins among others.

The growing demand of petrochemicals from major end use industries such as transportation, chemical, construction and packaging is expected to drive the petrochemical industry globally.

The US has become the major segment of earnings for many petrochemical companies. For some of them the US accounts for 80% of earnings.

What lies ahead for the booming industry of petrochemical production in the US? Will the current boom eventually go bust? In reality, this industry tends to oversupply as prices for natural gas and crude oil rise and drilling companies start building up production. Also, cheap crude oil prices make naphtha cheaper, which puts prices of ethylene and other petrochemical derivatives under pressure. Crude oil prices must keep below $70 a barrel for a longer term horizon in order to consider naphtha as a serious threat for a booming petrochemical industry in United States.  

Now let’s turn to petrochemical companies that we consider the best buys right now.

Sasol

Sasol Limited is a South-African energy company. Petrochemical products account for 60% of company’s revenue. Sasol has production and refining facilities in South Africa, Europe, North America and Asia.

Sasol Limited is a South-African energy company. Petrochemical products account for 60% of company’s revenue. Sasol has production and refining facilities in South Africa, Europe, North America and Asia.

Sasol has moderate valuation metrics with P/E at 7.36 and P/B of 1.6. EV/T12M EBITDA stands at 4.12. Based on company’s current profitability it has a decent upside potential.

Also, there is a bonus of 2.95% dividend yield.

Sasol has a strong balance sheet with debt/capital standing  at 13%. Company has $3.5 billion in cash and equivalents, which covers company’s total debt of $2.4 billion. Total debt/T12M EBITDA is also very low – 0.43.

Lyondell Basell

Lyondell Basell is the US petrochemical giant, which has gone from bankruptcy in 2009 to profits the next year. Lyondell Basell’s case illustrates how the industry of petrochemicals in United States has transformed in recent years.

The company had a loss of $2.8 billion and negative FCF of $1.5 billion in 2009. Now, it enjoys a profit margin of 9%, while normalized 5Y ROE reached 39.75%.

As Sasol and Phillips 66, Lyondell Basell has a high dividend yield of 3%.

Lyondell Basell is a little more leveraged than Sasol, but still has debt /capital of 46% and total debt/T12M EBITDA ratio of 1.05.

Phillips 66

Phillips 66 is a downstream energy company. It was split off ConocoPhillips and in 2012 its stock started trading on NYSE. Now its operations are mainly concentrated in gas condensates and petrochemicals.

The company has a very attractive dividend yield of 2.74% with a 42.35% 1Y net growth in dividend yield. Phillips 66 is paying dividends since 2012, when dividend yield was a modest 0.85%. 

Phillips 66 has low levels of debt with debt/capital at 28.3% and total debt/T12M EBITDA at 1.95. 
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