Westlake Fly High on Ethylene Unit IPO Plans - Analyst Blog

Shares of specialty chemical maker Westlake Chemical WLK screamed higher after it reported that its fully-owned subsidiary – Westlake Chemical Partners LP – has submitted a registration statement with the U.S. Securities and Exchange Commission (SEC) pertaining to its planned initial public offering IPO of common units.

Chemical Partners is a master limited partnership MLP subsidiary which Westlake recently created to operate facilities that convert natural gas liquid feedstocks (primarily ethane) to ethylene, a major petrochemical building block used to make an array of derivatives utilized across a vast spectrum of end-use markets including packaging, construction and transportation. MLPs are tax-advantaged entities that offer relatively higher income distributions to their shareholders.

Texas-based Westlake's shares shoot up as much as around 14% in the trading session following the announcement to clock a new 52-week high of $73.38. The stock pulled back to eventually close at $70.53 yesterday, gaining nearly 10%. Westlake's shares are up around 16% so far this year.  

Chemical Partners' initial assets will be comprised of the general partner interest and a part of the limited partner interest in Westlake Chemical OpCo LP, an entity which will own and operate ethylene production and pipeline assets.

According to the regulatory filing, the assets of OpCo, a partnership between Westlake and Chemical Partners, will consist of three (two at Westlake's Lake Charles, LA facility and one at its Calvert City, KY complex) ethylene production facilities with total annual capacity of roughly 3.4 billion pounds and a 200-mile ethylene pipeline. OpCo will earn majority of its revenues from its ethylene production facilities.

Chemical Partners plans to apply for listing its common units on the NYSE under the symbol "WLKP." The entity plans to raise roughly $271.7 million from the IPO, as per the filing. However, the number of units to be offered in the proposed IPO and their price range have not been determined yet. Barclays Capital and UBS Securities will serve as joint book-running managers for the planned offering.

Westlake said that it will own the general partner of Chemical Partners and all of its incentive distribution rights. It will also own a 90% limited partner interest in OpCo following the completion of the IPO. Moreover, Westlake will enter into a 12-year ethylene sales pact with OpCo, under which, the former will buy 95% of OpCo's planned ethylene production annually.

Westlake saw its profit for the fourth quarter of 2013 catapult roughly 79% year over year to a record $171 million as it gained from higher pricing for several of its products and lower cost ethane-based ethylene production stemming from North American natural gas liquids production.

Westlake expects continued cost benefits from North American shale gas production. The company remains committed to invest to capture this cost advantage.

Westlake, a Zacks Rank #2 (Buy) stock, will report its first-quarter results on May 5.

Other specialty chemical stocks worth considering include Kraton Performance Polymers Inc. KRA, PolyOne Corp. POL and A. Schulman, Inc. SHLM with all retaining a Zacks Rank #2 (Buy).