Introduction
Westlake Chemical Partners LP (WLKP) has established itself as a reliable and resilient player in the ethylene production industry over the past decade. Since its initial public offering in 2014, the partnership has demonstrated a steadfast commitment to delivering consistent returns to its unitholders while navigating the ebbs and flows of the broader market.
Company Origins and Growth
The company’s origins can be traced back to March 2014 when it was formed as a Delaware limited partnership to operate, acquire, and develop ethylene production facilities and related assets. In August 2014, the partnership completed its initial public offering, selling 12.94 million common units. As part of the IPO, the partnership acquired a 10.6% limited partner interest in Westlake Chemical OpCo LP (OpCo) and a 100% interest in OpCo’s general partner. Over the years, the partnership has gradually increased its ownership stake in OpCo, reaching 22.8% as of the latest reporting period.
This growth in ownership was achieved through several strategic acquisitions. In April 2015, the partnership purchased an additional 2.7% interest, increasing its total stake to 13.3%. This was followed by another increase to 18.3% in September 2017 after the partnership completed a secondary public offering. The partnership’s ownership interest in OpCo reached its current level of 22.8% in March 2019 after the completion of a private placement of 2.94 million common units.
Core Operations
OpCo, which forms the core of Westlake Chemical Partners’ operations, owns three ethylene production facilities and one common carrier ethylene pipeline. These assets, referred to as the Contributed Assets, have been the sole revenue source for the partnership since its formation. This structure provides a stable foundation for the partnership’s financial performance.
Specifically, OpCo’s assets include two ethylene production facilities at Westlake’s Lake Charles, Louisiana site (Petro 1 and Petro 2), one ethylene production facility at Westlake’s Calvert City, Kentucky site (Calvert City Olefins), and a 200-mile common carrier ethylene pipeline (the Longview Pipeline) that runs from Mont Belvieu, Texas to Westlake’s Longview, Texas facility.
Challenges and Resilience
In September 2021, the partnership faced a challenge when a flash fire incident occurred at the Petro 2 facility operated by OpCo. This resulted in several lawsuits being filed against Westlake and OpCo. However, Westlake and its subsidiaries were responsible for indemnifying the partnership against any losses incurred as a result of the incident, allowing the partnership to navigate this challenge without material impact to its financial position or operations.
Financials
Westlake Chemical Partners’ financial performance has been a testament to the stability of its business model. For the fiscal year ended December 31, 2023, the partnership reported net income of $54.28 million, with annual revenue reaching $1.19 billion and operating cash flow of $452.00 million. The partnership’s strong liquidity position is further underscored by a cash and cash equivalents balance of $60.21 million as of the most recent reporting period.
The partnership’s financial strength is underpinned by its long-term, fee-based Ethylene Sales Agreement with Westlake. This agreement, which accounts for the majority of Westlake Chemical Partners’ revenue, provides a predictable and stable cash flow stream by requiring Westlake to purchase a minimum volume of ethylene production from OpCo at a predetermined price. This structure effectively insulates the partnership from the volatility of commodity prices, a critical factor in the cyclical chemical industry.
In the third quarter of 2024, the partnership reported revenue of $277.0 million and net income of $18.14 million. While these figures represent year-over-year decreases of 13.90% and 37.30% respectively, primarily due to lower ethylene sales volumes and prices to Westlake, they were partially offset by higher ethylene and co-products sales volumes and prices to third parties. Operating cash flow and free cash flow for the quarter increased by 25.00% and 9.50% respectively year-over-year, reaching $126.07 million and $110.53 million, driven by higher net income and lower maintenance capital expenditures.
The partnership’s gross profit for the third quarter of 2024 was $116.9 million, up from $93.0 million in the third quarter of 2023, reflecting lower ethane feedstock costs and natural gas prices, as well as $6.2 million in insurance recoveries related to a previous business interruption event. Gross profit margin increased to 42.2% in the third quarter of 2024, compared to 28.9% in the prior-year period.
MLP distributable cash flow, a non-GAAP measure used by the partnership, increased to $17.9 million in the third quarter of 2024, up from $13.6 million in the third quarter of 2023, primarily due to the higher earnings at OpCo and lower maintenance capital expenditures, partially offset by higher reserves for future turnarounds. EBITDA, another non-GAAP measure, increased to $139.1 million in the third quarter of 2024, up from $115.7 million in the prior-year period, driven by the same factors that improved gross profit.
Liquidity and Shareholder Returns
Westlake Chemical Partners’ dedication to shareholder returns is evident in its consistent quarterly distributions. Since its IPO, the partnership has increased its quarterly distribution by 71%, from the original minimum of $0.275 per unit to the current $0.4714 per unit. The partnership has maintained 41 consecutive quarterly distributions, a testament to the resilience of its business model and its commitment to rewarding its unitholders.
The partnership’s financial health is further evidenced by its strong liquidity position. As of the most recent reporting period, Westlake Chemical Partners had a debt-to-equity ratio of 0.48, indicating a balanced capital structure. The partnership’s current ratio of 4.53 and quick ratio of 4.46 demonstrate its ability to meet short-term obligations comfortably.
In terms of available credit, the partnership has access to two revolving credit facilities. The OpCo Revolver has a $600 million capacity, with outstanding borrowings of $22.62 million, while the MLP Revolver also has a $600 million capacity, with outstanding borrowings of $377.06 million. These credit facilities provide the partnership with additional financial flexibility to pursue growth opportunities and manage its operations effectively.
Growth Strategy
The partnership’s growth strategy has focused on strategic acquisitions and investments to expand its ethylene production capacity and diversify its asset base. In 2019, the partnership completed a private placement of 2.94 million common units, using the proceeds to acquire an additional 4.5% interest in OpCo, increasing its total ownership to 22.8%. This transaction strengthened the partnership’s position and provided greater exposure to the underlying assets.
Resilience in Challenging Times
Despite the challenges posed by the COVID-19 pandemic and other macroeconomic headwinds, Westlake Chemical Partners has demonstrated its ability to navigate uncertain times. The partnership’s diversified asset base, long-term sales agreements, and prudent financial management have enabled it to maintain its operational and financial resilience.
Future Outlook
Looking ahead, Westlake Chemical Partners remains focused on optimizing its existing assets, exploring strategic growth opportunities, and continuing to deliver stable and predictable returns to its unitholders. The partnership’s strong balance sheet, access to capital, and proven track record position it well to capitalize on future industry trends and create value for its investors.
For the remainder of 2024, the partnership has no planned turnarounds, having deferred the Petro 1 ethylene unit turnaround to the first quarter of 2025. This turnaround is expected to last approximately 55 days. While third-party ethylene sales prices and margins have decreased in the fourth quarter of 2024 compared to the elevated levels in the third quarter, the partnership has relatively little third-party sales volume planned for the rest of the year.
The partnership’s management has emphasized that its stable, fee-based cash flow structure from the take-or-pay contract with Westlake will continue to deliver predictable cash flows through economic fluctuations and planned and unplanned turnarounds. This structure provides a solid foundation for the partnership’s future performance and distribution stability.
Conclusion
In conclusion, Westlake Chemical Partners’ decade-long journey as a publicly traded master limited partnership has been marked by consistent financial performance, strategic growth, and a steadfast commitment to shareholder returns. The partnership’s unique business model, centered around its ownership stake in OpCo and its long-term Ethylene Sales Agreement with Westlake, provides a stable foundation for generating predictable cash flows. Despite facing challenges such as market volatility and operational incidents, the partnership has demonstrated resilience and adaptability.
As Westlake Chemical Partners enters its next chapter, investors can take solace in its proven ability to navigate the complexities of the ethylene production industry and deliver sustainable value over the long term. With a strong liquidity position, access to credit facilities, and a history of consistent distributions, the partnership is well-positioned to continue its trajectory of stability and growth in the years to come.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.