Dow Chemical to Start Building Ethylene Cracker in Texas - Analyst Blog

In sync with its strategy to leverage cost-advantaged shale gas-based feedstocks, U.S. chemical kingpin Dow Chemical DOW will start the construction of its world-scale ethylene production facility in Freeport, TX, on Jun 30. This new cracker (converts ethane into ethylene) represents a significant part of Dow's Texas Operations in Freeport.

The Freeport ethylene cracker, which represents a major part of Dow's roughly $4 billion U.S. Gulf Coast investments, is expected to be operational in first-half 2017 and employ 2,000 people during its construction. The facility, which has an estimated capacity of around 1,500 kilotons per annum (KTA), will facilitate growth and expansion of the company's performance plastics business.

Dow's U.S. Gulf Coast investments in Texas and Louisiana are expected to collectively employ 5,000 people during peak construction. The projects in Freeport represent most of these employments with 4,000 workers needed for building multiple feedstocks, derivatives and supporting infrastructure projects.

Dow Texas Operations in Freeport is the company's biggest integrated manufacturing site globally and the largest chemical complex in North America with over 4,200 workers.

Jim Fitterling – Dow's executive vice president of feedstocks, energy and performance plastics – said that the Gulf Coast investment will connect cost-advantaged raw materials to many of the company's highest-margin downstream businesses including performance plastics.

Affordable natural gas and ethane (derived from shale gas) offer U.S. producers a compelling cost advantage over their global counterparts who use a more expensive, oil-based feedstock. Leveraging the abundant natural gas supply and cost advantage, chemical makers, including Dow, are investing billions of dollars for setting up crackers that produce ethylene from ethane.

Dow, one of the biggest ethylene producers on the planet, is seeing significant feedstock advantage in North America. The company's investments in U.S. Gulf coast and Middle East (including the Sadara joint venture) are focused on boosting this advantage. Dow expects its U.S. Gulf coast investments to deliver EBITDA of $2.5 billion when fully operational and offer a strong base for growth in the long term.

The new ethylene cracker together with Dow's propylene PDH project will take it a step further to realize the financial benefits of its Gulf Coast investments. The PDH unit in Freeport is more than 30% complete and is expected be fully operational by mid-2015. The unit is expected to benefit from favorable propane to propylene spread.

Dow's strategic investments, including Sadara and U.S. Gulf coast, are expected to help it achieve its overall EBITDA target of over $10 billion in the near term.  

Dow is a Zacks Rank #3 (Hold) stock.

Other companies in the chemical space worth considering include Compass Minerals International Inc. CMP, PetroLogistics LP PDH and Celanese Corporation CE. While both Compass Minerals and PetroLogistics carry a Zacks Rank #1 (Strong Buy), Celanese sports a Zacks Rank #2 (Buy).