2024-04-24 05:03:14 ET
Summary
- Westlake Chemical Partners is a producer of ethylene used by Westlake for its products on what is almost an exclusive supply agreement.
- WLKP's cash flows are stable, but the risk lies in potential changes to the ethylene supply agreement with WLK.
- WLK's control over WLKP's assets raises concerns, but WLK's ownership in WLKP may incentivize them to maintain favorable terms, in addition to the economics of the agreement itself.
- WLKP is valued like US high yield fixed income. We are inclined to believe this is not very fair, but the unit is also still quite speculative.
Westlake Chemical Partners ( WLKP ) is a business that is under the relatively benevolent thumb of Westlake ( WLK ) as its producer of ethylene which is then used by Westlake for its various PVC. The inputs to the process of producing ethylene are various natural gases and LPGs, and the rapid rise in some of these prices was the reason for some temporary margin pressure on WLKP as of our last coverage that has since been passed through. The WLK cash flows over the course of a year with only slight dislocations are essentially at guaranteed margins through a markup agreement for the units sold. But it is up to WLKP to control SG&A, and also volumes are slightly variable. The only real risk is that there becomes some sort of significant change to the agreement when it expires in late 2026. While we were aware of this risk before, as we approach closer to the date the horizon for a guaranteed dividend yield has been reduced, we see this as increasingly speculative and are being more cautious....
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Westlake Chemical Partners: Stabilised And Hoping For More End-Market Volume (Downgrade)