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Westlake 3Q Best Ever Thanks to Ethane

The effects of cheap U.S. ethane were writ large in the third quarter results of Westlake Chemical Corp., which has a number of projects under way to take greater advantage of the low-cost feedstock.

"Westlake reported the strongest third quarter in our history with a net income of $87 million, or $1.30 per diluted share, on sales of $821 million. The earnings per share of $1.30 include the impact of costs related to a scheduled plant outage and debt retirement costs totaling 17 cents/share," CEO Albert Chao told analysts Thursday during a conference call.

The quarter's results represent an increase in net income of $19.1 million from third quarter 2011 net income of $67.9 million, ($1.01/share), on sales of $968.4 million.

"The decrease in feedstock costs continued in the third quarter, particularly for ethane," Chao said. "The growing production of natural gas liquids from shale gas and oil production have caused ethane supply to become long as significant capacity in fractionation and pipeline infrastructure bring ethane to market faster than the North American chemical industry can consume it. Westlake's earnings this quarter reflected this ongoing benefit of expansion in shale gas production. These lower-cost feedstocks have reset the North American chemical industry's cost position globally and have spurred a resurgence in debottlenecking and other expansion projects to capitalize on this advantageous position."

In September, Westlake announced a series of growth plans for its Calvert City, KY, facility (see NGI, Oct. 8). These include expansions of an ethylene unit by 40% from 450 million pounds to 630 million pounds per year, the conversion of the unit from propane to ethane feedstock and expansion of a polyvinyl chloride (PVC) facility in Calvert City by 200 million pounds a year, Chao said.

"The financial benefits of our expansion plans will materialize beginning in the first quarter of 2013 with expansion of one of our ethane units in Lake Charles [LA] and the start-up of the chlor-alkali unit at Geismar [LA] in the second half of 2013," he said. "In 2014, we'll see the financial contributions from the completion of our expansion plans in Calvert City in PVC and in ethylene. And in 2015, we'll complete yet another ethylene expansion in Lake Charles."

An analyst asked Chao about pain felt by ethylene producers on the other side of the world due to cheap U.S. ethane. Margins for Asian ethylene producers are weak, and Chao was asked what he expected in the way of plant shutdowns in Asian countries.

"That's a good question," he said. "I think some of the Asian naphtha crackers are losing money in the operation. They may make profits in the downstream area, so they can afford to shut down the upstream. Some of the older, smaller plants may have more pressures of shutdowns in the future. Smaller and older ethylene plants and less integrated ethylene plants will be very vulnerable, in our opinion."

In the United States, Chao said he expects ethane inventories to increase next year as "there's a lot more fractionators and pipelines coming onstream. So we believe that ethane inventory would trend up."

Also during the call, Chao brought up the possibility of Westlake creating a master limited partnership (MLP), a structure familiar to the midstream energy sector and drawing increasing interest from other industries. "We look for avenues to grow our business and enhance our shareholders' value, and the consideration of an MLP structure is no exception," Chao said. "This is a complex area. It'll take some time to evaluate the merits of an MLP structure for some of our assets."

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