Executive Summary / Key Takeaways

• Contractual Stability as Core Moat: Westlake Chemical Partners' 22.8% interest in OpCo generates predictable cash flows through a fee-based ethylene sales agreement covering 95% of production at a fixed $0.10 per pound margin, creating a unique insulation from commodity volatility that integrated peers cannot replicate.

• Turnaround Completion Marks Inflection: The Petro 1 unit's planned turnaround, which compressed Q1-Q2 2025 distributable cash flow by $17.3 million year-over-year, concluded in Q2 with the unit now running reliably, setting up a return to 1.1x distribution coverage and eliminating major operational disruptions through 2026.

• Valuation Tension Between Yield and Growth: Trading at $19.68 with a 9.76% dividend yield and 13.9x P/E, WLKP offers exceptional income but faces a 135% payout ratio that, while temporarily elevated by turnaround costs, underscores limited growth optionality compared to reinvestment-focused competitors.

• Scale Disadvantage Versus Integration: At 1.14 billion in annual revenue and 0.9 million tons of ethylene capacity, WLKP's niche position lacks the downstream integration and cost structure of Dow , LyondellBasell , and ExxonMobil , creating concentration risk with Westlake while offering superior yield stability.

Setting the Scene: The MLP That Isn't a Commodity Play

Westlake Chemical Partners LP, formed as a Delaware limited partnership in March 2014 and headquartered in Houston, Texas, occupies a unique structural position in the US petrochemical landscape. Unlike traditional master limited partnerships that own pipelines or storage terminals, WLKP holds a 22.8% limited partner interest in Westlake Chemical OpCo LP, which operates three ethylene crackers and a 200-mile pipeline. This ownership structure fundamentally alters the investment proposition: WLKP is not a direct bet on ethylene prices, but a play on contractual cash flow stability.

The partnership generates revenue by selling ethylene to its parent, Westlake Corporation , under a long-term fee-based agreement that guarantees a minimum purchase of 95% of budgeted production. The pricing formula—covering actual feedstock and natural gas costs, estimated operating expenses, a five-year average of maintenance capital, plus a fixed $0.10 per pound margin—transforms what is typically a cyclical commodity business into a predictable utility-like stream. This structure explains why WLKP has delivered 45 consecutive quarterly distributions since its 2014 IPO, growing payouts 71% from the original minimum while integrated peers have endured volatile earnings.

The US ethylene industry, with over 30 million tons of annual capacity, operates as an oligopoly dominated by integrated giants like Dow , LyondellBasell , and ExxonMobil . These competitors capture value through massive scale, downstream polyethylene integration, and global reach. WLKP's 0.9 million ton capacity represents a niche position, but its strategic value lies in supplying Westlake's internal derivative production, ensuring captive demand. The shale gas revolution provided all US producers with low-cost ethane feedstock, but WLKP's contractual model eliminates the price risk that makes its peers' earnings swing with supply-demand imbalances.

Technology, Products, and Strategic Differentiation

The Ethylene Sales Agreement functions as WLKP's core technology—not a physical process, but a contractual innovation that solves the chemical industry's fundamental problem: margin volatility. By embedding operating costs, turnaround reserves, and a fixed margin into the pricing mechanism, the agreement acts as a pass-through mechanism that shields OpCo from both feedstock inflation and ethylene price crashes. This allows WLKP to maintain 29.8% gross margins and 15.7% return on assets even when spot ethylene margins compress, as they did in early 2025.

The MLP structure itself represents a strategic differentiator. Unlike C-corps that must retain earnings for reinvestment, WLKP distributes most excess cash, creating a tax-efficient yield vehicle. This structure attracts income-focused investors and lowers WLKP's cost of equity for potential dropdown acquisitions from Westlake . However, it also constrains management's ability to fund organic growth or diversification without issuing new units, creating a trade-off between current yield and future optionality.

Operational efficiency stems from Westlake's comprehensive services agreement, under which the parent provides all operating, maintenance, and seconded employees. This arrangement eliminates corporate overhead—WLKP has zero employees—and ensures best-in-class operational execution, as evidenced by the successful Petro 1 turnaround completion. While Dow and LyondellBasell must manage vast corporate structures, WLKP's asset-light model converts revenue to cash flow with minimal friction, generating $105 million in quarterly operating cash flow on $309 million in sales.

Financial Performance & Segment Dynamics

Third quarter 2025 results validate the turnaround recovery thesis. Net sales increased 11.5% year-over-year to $308.9 million, driven by higher ethylene prices and volumes to Westlake . However, gross profit margin compressed to 32.2% from 42.2% in Q3 2024, as higher ethane and natural gas costs outpaced pricing adjustments. This margin pressure illustrates the agreement's limitation: while it protects against price volatility, it cannot instantly recapture feedstock spikes, creating a timing lag that temporarily squeezes profitability.

Distributable cash flow of $14.9 million ($0.42 per unit) remained below the $0.4714 distribution, but this shortfall was expected and covered by operating surplus. The $17.3 million year-over-year decline in nine-month DCF stemmed entirely from the Petro 1 turnaround's $70 million in capital expenditures and lost production. With the turnaround complete and no further major maintenance planned through 2026, management expects coverage to return to the historical 1.1x target. The Q3 buyer deficiency fee of $13.6 million, recognized because the turnaround extended into April, demonstrates the contract's protective mechanism: Westlake must pay for committed volumes even when OpCo cannot produce.

Balance sheet strength provides crucial flexibility. At quarter-end, WLKP held $37.9 million in cash plus $13.4 million invested with Westlake under the Investment Management Agreement, while maintaining a conservative 1.0x consolidated leverage ratio. The $377 million MLP revolver and $23 million OpCo revolver, both extended to 2027 with SOFR-based pricing , provide liquidity at a weighted average rate of 6.1%. This low-leverage profile contrasts sharply with LyondellBasell's 1.24x debt-to-equity and Dow's 1.03x, giving WLKP superior financial resilience.

The payout ratio of 135.65% raises sustainability questions, but context matters. The ratio spiked because turnaround costs temporarily reduced DCF while distributions remained stable. Management's guidance of 1.1x coverage post-turnaround implies the ratio will normalize below 100% in 2026. Unlike peers cutting dividends during downturns—LyondellBasell's payout ratio is undefined due to losses—WLKP's contractually protected cash flows support consistent distributions, making the current elevated ratio a temporary artifact rather than structural imbalance.

Outlook, Management Guidance, and Execution Risk

Management's guidance frames 2026 as a year of operational stability. With no planned turnarounds, production volumes should reach normalized levels, supporting full-year DCF of approximately $67 million based on historical patterns. The Ethylene Sales Agreement renewal through December 2027, with unchanged terms, provides revenue visibility while capping margin expansion potential. This extension eliminates the single largest risk—contract non-renewal—while confirming Westlake's strategic dependence on OpCo's supply.

Four growth levers exist in theory: increasing OpCo ownership, acquiring qualified income streams, organic expansion, or renegotiating the fixed margin. In practice, management signaled in Q2 2025 that none are likely near-term. Westlake has no immediate need for equity capital, and MLP dropdown stories have contracted due to valuation differentials. This pragmatic stance preserves the current yield but limits upside, positioning WLKP as a yield instrument rather than a growth story.

Macro headwinds pose minimal threat due to the contract structure. While global industrial activity remains soft in 2025 and Chinese capacity additions pressure spot ethylene prices, 95% of WLKP's production is insulated. The partnership benefits modestly from tight supply-demand conditions through higher third-party co-product sales, which contributed to Q3's pricing gains. This dynamic creates an asymmetric risk profile: downside protected by contract, upside participation limited to 5% of production.

Execution risk centers on cost management. The agreement allows recovery of 95% of actual production costs, but the 5% shortfall risk plus timing lags on feedstock pass-through requires disciplined operational control. The successful Petro 1 turnaround, completed on time and within the $70 million budget, demonstrates competent execution. However, any future operational missteps would directly compress the fixed margin, as the $0.10 per pound component does not adjust for inefficiencies.

Risks and Asymmetries

Customer Concentration: Westlake's 95% purchase commitment represents both a moat and a vulnerability. If Westlake's downstream polyethylene operations face margin pressure from Chinese imports or demand weakness, it could reduce discretionary purchases above the minimum or delay expansion projects that would increase OpCo's budgeted production. While the contract requires payment for 95% of budgeted volumes regardless of Westlake's utilization, a sustained downturn could lead to renegotiation pressure at the 2027 renewal. This concentration risk is materially higher than Dow's or ExxonMobil's diversified customer bases.

Scale and Integration Disadvantage: WLKP's 0.9 million ton capacity compares to Dow's multi-million-ton systems with integrated polyethylene units that capture margin at every stage. This scale gap manifests in higher per-unit operating costs and limited pricing power on the 5% third-party sales. During periods of severe oversupply, integrated players can idle merchant capacity while running derivative units, whereas WLKP must operate to meet contract minimums, potentially selling into a weak spot market for co-products. The 30.8% gross margin, while stable, lags ExxonMobil's 31.2% and far exceeds Dow's 7.2% and LyondellBasell's 8.2%, reflecting WLKP's cost-pass-through advantage but also its lack of downstream value capture.

Feedstock Cost Lag: The pricing formula's reliance on estimated costs creates a timing mismatch. When ethane prices spiked in Q3 2025, margins compressed immediately, but the cost recovery adjustment occurs annually. This lag can create multi-quarter margin pressure, as seen in the 29.8% nine-month gross margin versus 37.9% in 2024. While the agreement includes a true-up mechanism, the working capital impact and temporary DCF shortfall represent a genuine earnings volatility source that pure-play pipelines avoid.

MLP Structural Constraints: The requirement to distribute most cash flow limits management's ability to build retained earnings for acquisitions or organic growth. With a 135% payout ratio, the partnership is effectively borrowing from future DCF to maintain current distributions. If another turnaround occurs before sufficient surplus accumulates, management might need to cut distributions or issue dilutive equity, destroying unit holder value. This structural rigidity contrasts with corporate peers that can retain earnings during downturns.

Valuation Context

At $19.68 per share, WLKP trades at 13.9x trailing earnings and 2.4x EV/EBITDA, a significant discount to integrated peers. Dow commands 9.1x EBITDA, LyondellBasell 10.4x, and ExxonMobil 8.7x, reflecting their scale and growth optionality. WLKP's 9.76% dividend yield towers above ExxonMobil's (XOM) 3.45% and Dow's 5.69%, though LyondellBasell's 12.12% yield comes with negative earnings and an undefined payout ratio.

The enterprise value of $1.06 billion represents 0.93x revenue, a modest premium to Dow's (DOW) 0.78x and LyondellBasell's (LYB) 0.80x, but justified by WLKP's stable margin structure. Price-to-operating cash flow of 2.4x and price-to-free cash flow of 3.3x indicate exceptional cash conversion efficiency, driven by the asset-light model and contract predictability. These multiples suggest the market values WLKP as a bond-proxy rather than an operating company, pricing in minimal growth but high cash flow certainty.

The 135.65% payout ratio, while elevated, must be viewed in context. Turnaround costs of $70 million in 2025 represented a one-time DCF drain of approximately $0.55 per unit. With normalized maintenance capex of $49 million annually and no major turnarounds until 2027, DCF should recover to $1.80-1.90 per unit, bringing the payout ratio to 95-100%. This trajectory supports the current distribution while highlighting the razor-thin margin for error. Unlike peers with flexible dividend policies, WLKP's distribution is a contractual commitment to unit holders, making the sustainability of this ratio the single most important valuation variable.

Conclusion

Westlake Chemical Partners has engineered a unique position in the ethylene market: a high-yield, low-volatility investment that converts contractual cash flows into consistent distributions. The completion of the Petro 1 turnaround and renewal of the Ethylene Sales Agreement through 2027 remove near-term operational and strategic risks, setting the stage for distribution coverage to normalize to the historical 1.1x target. This stability, however, comes at the cost of growth optionality and exposes unit holders to concentration risk with Westlake .

The investment case hinges on two variables: Westlake's (WLK) operational health and management's discipline in managing the narrow margin between DCF and distributions. While the 9.76% yield appears attractive relative to integrated peers, the 135% payout ratio serves as a reminder that this is a yield vehicle operating with minimal surplus. For income-focused investors seeking shelter from commodity cyclicality, WLKP offers a compelling proposition. For those requiring growth or diversification, the partnership's structural constraints and scale limitations will prove frustrating. The next two years will demonstrate whether this yield island can withstand the broader storms of overcapacity and feedstock volatility without diluting its core promise of predictable cash returns.