April 2015


HP Petrochemicals: US petrochemical revival slows amid weaker oil

Since the shale revolution, US oil and gas majors have run on all cylinders, drastically curbing US dependency on foreign resources. But the past six months changed it all. A 53% plunge in oil prices ..

Martin, S., Contributing Editor

Since the shale revolution, US oil and gas majors have run on all cylinders, drastically curbing US dependency on foreign resources. But the past six months changed it all. A 53% plunge in oil prices over the past year and the 33% slump in gas prices since July are cutting into profit margins and slowing upstream projects. This anomaly is trickling down the energy ladder.

Downgraded financial outlooks

US petrochemical companies are now seeing compressed margins for ethylene and propylene, and industry analysts are taking note. Early this year, Merrill Lynch’s Kevin McCarthy released a report reflecting a more cautious take on major chemical companies. Many analysts are now mirroring his stance as ratings fall for major players.

To that end, Merrill Lynch downgraded shares of LyondellBasell (Fig. 1) and Westlake Chemical from buy to neutral. Likewise, Dow Chemical’s price objective was lowered.


  Fig. 1. LyondellBasell produces polymers
  at its plant in Pasadena, Texas. 

Similarly, CitiGroup, Deutsche Bank, Susquehanna Financial Group and Bank of America lowered ratings for many chemical majors, largely based on expectations that margins will continue dropping through the first half of 2015.

NGL feedstock supply tightens

The drop in oil and gas prices, and its potential to tighten supplies of NGLs—the building blocks for petrochemicals and plastics—led to record low US ethylene margins in the latter half of 2014. Merrill Lynch suggests stunted margins could continue for an extended period, given the lack of a meaningful resurgence in oil.

“We are managing the company with the working assumption that 2015 average prices may be somewhat higher than we have experienced year-to-date, but not significantly,” said Targa Resources CEO Joe Bob Perkins.

However, Merrill Lynch’s forward curve continues to model oil at $53/bbl through 2015, which could mean low commodity prices through most of the year.

Targa is already seeing some impact in its LPG export business. Perkins says that the company’s LPG contracting demand is not “as heated as it was at this point last year.”

Outlook from petrochemical players

With petrochemicals specifically, LyondellBasell reduced the value of its fourth-quarter inventory to align with the collapse in commodity prices, with possible record valuation adjustments in the first quarter if current price conditions persist.

Overall, petrochemical prices were said to be 36% lower year-on-year in January. Meanwhile, integrated polyethylene (PE) margins are assumed to narrow from record highs in 2014 to levels more akin with 2012–2013 prices.

Merrill Lynch explained that the “sustainability” of cheap US NGLs appears “more tenuous” with the collapse in crude prices, which could result in diminished supplies coupled with rising ethane demand to feed the oncoming US Gulf ethylene plants planned to start up beginning in 2017.

High global demand for ethylene remains key, however, as cost advantages for US chemical majors remain intact in the global market despite the narrowing margins.

“Looking ahead, there is clearly pricing pressure, [but] demand fundamentals have not changed,” said Jack Broodo, Dow Chemical’s vice president of investor relations.

Outside the US, ethylene is largely derived from oil-based naphtha. Although oil prices have fallen, the US gas-based ethane still remains considerably more affordable, having also slipped by 38% from June 2014 to January 2015.

Project announcements

Since 2010, over 200 US chemical projects valued at more than $135 B have been announced, according to the American Chemistry Council. Many projects are under review, and some have been put on the back burner, or even canceled, due to the current cost environment.

Targa, for instance, plans to revisit the optimal capacity and start up of its shale processing plants, and to possibly curb other investments in its gathering and processing business.

In early 2015, Sasol put its planned $14-B natural gas-to-liquids (GTL) plant in Lake Charles, Louisiana on hold, while Axiall delayed a final investment decision (FID) on its $2-B ethane-cracker project in nearby Westlake, Louisiana, citing uncertain market dynamics.

Given the lack of outright cancellations, it appears most in the chemical industry consider oil’s collapse to be a temporary phenomenon. However, the delays and reduced financial outlooks certainly indicate that the industry is keeping a wary eye as the era of weaker oil prices continues to linger. HP

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