Westlake Plans Master-Limited Partnership IPO for Ethylene

Apr 29, 2014 5:04 pm ET

(Updates with comment from analyst in fourth paragraph.)

April 29 (Bloomberg) -- Westlake Chemical Corp., the U.S. plastics maker controlled by the billionaire Chao family, surged to a record after saying it had separated its ethylene assets into a tax-advantaged venture and plans to sell stock in the unit to the public.

The master-limited partnership includes three U.S. ethylene plants and a 200-mile (322-kilometer) pipeline, Houston-based Westlake Chemical Partners LP, the newly formed entity, said in a regulatory filing today. Ethylene, the most common petrochemical, is used to make products from plastic bottles to auto parts and pipe. The partnership would trade on the New York Stock Exchange under the symbol WLKP.

Westlake is creating the chemical industry’s first so- called MLP after the Internal Revenue Service in October 2012 ruled that companies converting ethane and other natural gas liquids into olefins like ethylene can classify themselves as such. The partnerships, common in the pipeline industry, generally don’t pay income taxes at the corporate level.

“The main value in this is to enable Westlake to not only avoid taxes on the ethylene business, but to also borrow money on more favorable terms,” James Sheehan, an Atlanta-based analyst for Suntrust Robinson Humphrey Inc. who recommends selling Westlake shares, said by phone today. LyondellBasell Industries NV and Dow Chemical Co. are “obvious candidates to do something similar.”

Boosting Westlake

The MLP, which may sell as much as $271.7 million in stock, may boost the value of Westlake by about $10 a share to $85, excluding the ethylene pipeline, Hassan Ahmed, a New York-based analyst at Alembic Global Advisers who recommends buying the shares, said today in a note.

Westlake will own 90 percent of the partnership’s operating company, leaving 10 percent available for sale in an initial public offering, and will control its general partner, according to the filing. Westlake jumped 9.9 percent to $70.53 at the close in New York, the highest closing price since the shares began trading in 2004.

Westlake will buy 95 percent of the partnership’s ethylene production at a 10 cent-per-gallon premium over production costs. The partnership’s tax status will save Westlake about $120 million a year, boosting annual earnings by as much as $1 a share, Sheehan said.

The partnership plans to borrow funds from Westlake for a $153 million expansion of an ethylene facility in Lake Charles, Louisiana, to be completed by early 2016, according to the filing.

Shale Boom

The move comes as earnings at U.S. ethylene producers, from Westlake to Dow, are near record levels after a shale boom created plentiful and cheap supplies of natural gas liquids. That provides a cost advantage over producers in Asia and Europe where oil-derived naphtha is the main feedstock.

The assets in Westlake’s partnership generated $1.2 billion of revenue and $367.1 million of earnings before interest, taxes, depreciation and amortization last year, the MLP said. Westlake would have accounted for about 70 percent of the partnership’s ethylene sales last year.

The partnership forecast its Ebitda will rise to $437.4 million in 2015, with $32.2 million of cash available to be distributed to shareholders after payouts to Westlake.

LyondellBasell will “continue our evaluation” of forming an MLP, James Gallogly, chairman and chief executive officer, said on conference call today in response to a question.

Williams Cos., which requested the 2012 IRS ruling, also may form an ethylene MLP, Sheehan said.

Methanex Corp., the world’s largest methanol supplier, could announce plans this year for an MLP structure for plants relocated from Chile to Louisiana, Laurence Alexander, a New York-based analyst at Jefferies & Co. who recommends buying the shares, said in a note today.

Barclays Plc and UBS AG are underwriting the Westlake public offering.