Westlake Chemical Partners LP (WLKP) has established itself as a resilient and predictable player in the ethylene production landscape, demonstrating its ability to navigate the volatile conditions that have characterized the industry in recent years. Founded in 2014, the partnership has consistently delivered value to its unitholders through its unique business model, which revolves around a long-term, fee-based ethylene sales agreement with its parent company, Westlake Corporation.
Business Overview and History Westlake Chemical Partners LP was formed in March 2014 as a Delaware limited partnership to operate, acquire, and develop ethylene production facilities and related assets. The partnership's initial public offering in August 2014 saw it acquire a 10.6% limited partner interest in Westlake Chemical OpCo LP (OpCo), as well as a 100% interest in OpCo's general partner, Westlake Chemical OpCo GP LLC.
Since its IPO, Westlake Partners has gradually increased its ownership stake in OpCo, the entity that owns and operates the partnership's ethylene production facilities. In 2015, the partnership acquired an additional 2.7% interest, bringing its total stake to 13.3%. This was followed by a 5.0% increase in 2017, raising the partnership's ownership to 18.3%. Most recently, in March 2019, Westlake Partners completed a private placement of 2.94 million common units and used the net proceeds to purchase an additional 4.5% interest in OpCo, culminating in its current 22.8% limited partner ownership in OpCo.
OpCo's asset base includes two ethylene production facilities at Westlake's Lake Charles, Louisiana site (Petro 1 and Petro 2), as well as one facility at the company's Calvert City, Kentucky site (Calvert City Olefins). The partnership also owns a 200-mile common carrier ethylene pipeline, the Longview Pipeline, which runs from Mont Belvieu, Texas to Westlake's Longview, Texas facility.
Westlake Corporation retains the remaining 77.2% limited partner interest in OpCo, as well as a significant interest in the Partnership through its ownership of the Partnership's general partner and limited partner units. The Partnership generates revenue primarily by selling ethylene and the resulting co-products it produces, with a substantial majority of its revenue coming from an ethylene sales agreement with Westlake Corporation.
Throughout its history, the Partnership has faced various challenges, including volatility in commodity prices and market conditions. However, it has been able to maintain stable earnings and cash flows due to the structure of its ethylene sales agreement with Westlake. In 2021, the Partnership experienced a flash fire incident at its Petro 2 facility, resulting in injuries to contractors and employees. Notably, Westlake Corporation was responsible for indemnifying the Partnership in connection with any losses incurred as a result of the fire, demonstrating the protective nature of the partnership's relationship with its parent company.
Financial Performance and Ratios Westlake Partners' financial results have been characterized by stability and predictability, owing to the partnership's fixed-margin ethylene sales agreement with Westlake. This agreement, which covers 95% of OpCo's annual ethylene production, insulates the partnership from the volatility of market prices and other production risks.
For the full year 2024, Westlake Partners reported net income of $62.0 million, or $1.77 per unit, an increase of $8 million compared to the full year 2023 net income of $54 million. Consolidated net income, including OpCo's earnings, was $369.0 million on $1.14 billion in revenue. The partnership's distributable cash flow for the year was $67.7 million, resulting in a distribution coverage ratio of 1.01x. This represents an increase of $4 million compared to the full year 2023 distributable cash flow of $63 million, due to the higher net income.
In the fourth quarter of 2024, WLKP reported revenue of $290.1 million, a decrease of 9.8% compared to Q4 2023. This decline was primarily due to lower ethylene sales volumes and prices to Westlake, partially offset by higher ethylene and co-products sales volumes and prices to third parties. Net income for Q4 2024 was $15 million, an increase of 4.9% year-over-year, driven by lower SG&A expenses.
For the full year 2024, WLKP generated operating cash flow (OCF) of $352.5 million and free cash flow (FCF) of $318 million. In the fourth quarter of 2024, both OCF and FCF were $132.5 million.
As of the end of 2024, Westlake Partners had $193.0 million in consolidated cash and cash investments, with $400.0 million in long-term debt, of which $377.0 million was at the partnership level. The partnership maintained a strong consolidated leverage ratio of below 1.0x.
Key Financial Ratios - Gross Profit Margin: 36.9% - Operating Profit Margin: 34.4% - Net Profit Margin: 11.9% - Return on Assets: 10.5% - Return on Equity: 19.9% - Current Ratio: N/A - Quick Ratio: N/A - Debt-to-Equity Ratio: 0.48
These ratios demonstrate Westlake Partners' financial stability, profitability, and prudent management of its balance sheet.
Liquidity Westlake Partners' liquidity position remains strong, supported by its stable cash flows from operations and prudent financial management. The partnership's $193.0 million in consolidated cash and cash investments provide a solid buffer against potential operational or market disruptions. Additionally, the partnership's low leverage ratio of below 1.0x indicates a conservative approach to debt management, which enhances its financial flexibility and ability to pursue growth opportunities as they arise.
WLKP has access to a $600 million revolving credit facility with Westlake, with $377 million outstanding as of Q4 2024. This available credit line further strengthens the partnership's liquidity position and provides additional financial flexibility.
Operational Highlights and Outlook Westlake Partners' operational performance has been underpinned by the stability of its ethylene sales agreement with Westlake. In 2024, the partnership benefited from higher third-party ethylene sales prices and margins, which offset the impact of lower ethylene sales prices to its parent company.
Looking ahead, the partnership is preparing for a planned turnaround at its Petro 1 ethylene unit, which is expected to last approximately 60 days and begin at the end of January 2025. The partnership has fully reserved and funded the costs associated with this turnaround, which are reflected in the ethylene sales agreement with Westlake. WLKP mentioned that in prior years where they had a planned turnaround, the distribution coverage ratio is impacted for the period before recovering, and they expect a similar result for this upcoming turnaround.
WLKP stated that thus far in 2025, third-party ethylene sales prices and margins are again at relatively favorable levels, which would benefit their financial performance. This positive trend in spot ethylene prices and margins could contribute to higher earnings in the coming quarters.
Beyond the upcoming turnaround, Westlake Partners continues to explore opportunities to grow its business through various means, including increasing its ownership interest in OpCo, pursuing acquisitions of other qualified income streams, evaluating organic growth projects, and potentially negotiating a higher fixed margin in its ethylene sales agreement with Westlake.
The partnership has made 42 consecutive quarterly distributions to unitholders since its IPO in 2014, growing the distribution by 71% over that time. This track record underscores WLKP's commitment to delivering consistent value to its unitholders.
Risks and Challenges Despite Westlake Partners' strong track record, the partnership faces several risks and challenges that investors should be aware of. These include:
1. Commodity Price Fluctuations: While the partnership's ethylene sales agreement with Westlake mitigates its direct exposure to commodity price risk, it remains indirectly exposed to volatility in feedstock and energy prices.
2. Operational Disruptions: Unplanned outages or operational issues at the partnership's ethylene production facilities could disrupt its ability to meet its sales commitments and affect its financial performance.
3. Regulatory and Environmental Risks: Westlake Partners and its subsidiaries are subject to various environmental laws and regulations, which could result in compliance costs or liabilities.
4. Reliance on Westlake: As the partnership's sponsor and majority owner of OpCo, Westlake's financial condition and strategic decisions could have a significant impact on Westlake Partners.
Conclusion Westlake Chemical Partners LP has demonstrated its ability to deliver consistent value to its unitholders through its unique business model and strong operational execution. The partnership's fixed-margin ethylene sales agreement with Westlake provides a stable foundation for its financial performance, allowing it to navigate the industry's cyclical nature.
Looking ahead, Westlake Partners remains focused on exploring growth opportunities, maintaining its financial discipline, and upholding its commitment to safe and environmentally responsible operations. The partnership's ability to capitalize on favorable third-party ethylene sales prices and margins, coupled with its ongoing efforts to optimize operations and manage costs, positions it well for continued success.
As WLKP prepares for the planned turnaround at its Petro 1 facility in early 2025, investors can expect some short-term impact on the distribution coverage ratio. However, the partnership's proactive approach to reserving and funding for this maintenance event demonstrates its commitment to long-term operational excellence and financial stability.
With its strong liquidity position, conservative leverage, and consistent track record of distributions, Westlake Partners is well-positioned to continue delivering value to unitholders while navigating the challenges and opportunities in the ethylene production sector. As the partnership continues to execute its strategy, investors can expect Westlake Partners to remain a reliable and consistent performer in the industry.