Since the shale gas boom, the raw material prices of both of these segments have been reduced significantly. For example, within the olefins business, the company has increased its NGL cracking capability from 70% in 2010 to 87% in early 2013. Within Europe and Asia, the company believes its base of $350 million to $550 million in EBITDA should remain steady regardless of olefin and polyolefin margin conditions overseas.
However, a narrowing spread between ethylene and ethane prices means that market prices have adjusted for cheap raw-material prices. While this is seen to be a key factor in 2Q, LyondellBasell Industries NV (NYSE:LYB)’s exposure to the recent trends in the polymer market will more than offset this in 3Q/4Q 2013. Adjusting for this polymer margin upside, the full-year estimates for 2013/2014/2015 have been raised to $6.07/$7.31/$8.29, from $6.04/$7.00/$7.97, respectively.
Biggest winner of rising margins in the polymer environment
Goldman Sachs recently raised its 2Q 2013 estimate for Westlake Chemical Corporation (NYSE:WLK) to $2.17, from $2.05, marking to market the estimates as the company is seen as the biggest winner in the current polymer margin environment. Because Westlake has the greatest relative exposure to the polymer production process, with lower exposure than LyondellBasell to the ethylene markets, it will benefit most out in the chemical space to the current polyethylene-ethylene spreads. These margin trends are expected to continue to drive strong earnings in the medium term. Goldman has raised full-year 2013/2014/2015 estimates to $8.52/$9.44/$10.14, from $7.85/$8.92/$9.67, respectively.
Westlake Chemical Corporation (NYSE:WLK)’s polyethylene focus on low-density polyethylene (LDPE) has benefited earnings through the relative higher margins achieved in the product over the past decade. This advantage should continue to widen, as relatively fewer industry capacity additions are planned in LDPE. Likewise, within LDPE, most of the business is geared toward more specialty autoclave LDPE, with limited capacity additions.
The company is also confident on the outlook for its vinyl business. On the vinyl’s side, the company expects global polyvinyl chloride, or PVC markets, to remain tight over the long term, supported by a US housing recovery and export volume.
It can be deduced from investment theses of different chemical companies that most of the benefits of the shale-gas boom have already been factored in their stock prices. However, there have been some other emerging themes in the sector that have benefited the companies, like rising margins for polymer products. Westlake has been a major beneficiary of this trend.
The article Have the Shale Gas Benefits Been Factored Into the Chemical Space? originally appeared on Fool.com and is written by Zain Abbas.
Zain Abbas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Zain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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