10-Q: Westlake Chemical Partners LP Reports First Quarter 2024 Results

Westlake Chemical Partners LP's first quarter 2024 net income was $89.6 million, a slight decrease compared to $91.5 million in the same period last year.

Summary

• Westlake Chemical Partners LP reported a net income of $89.6 million for the first quarter of 2024, compared to $91.5 million in the first quarter of 2023.
• Net sales decreased to $284.7 million from $307.7 million year-over-year, primarily due to lower ethylene and co-product sales prices and lower sales volumes.
• The company's income from operations was $95.1 million, down from $98.2 million in the prior year's first quarter.
• MLP distributable cash flow was $16.9 million, a decrease from $17.6 million in the first quarter of 2023.
• EBITDA decreased to $124.4 million from $125.6 million in the same period last year.
• The company declared a quarterly cash distribution of $0.4714 per unit, payable on May 29, 2024.
• The weighted average interest rate on long-term debt was 7.2% at March 31, 2024.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with decreased revenue and earnings, but also some positive aspects like cost control and consistent distributions. The overall tone is cautious due to the challenging market conditions and the company's reliance on Westlake.

Positives

• The gross profit margin percentage was comparable year-over-year at 35.9% versus 34.5%.
• Selling, general and administrative expenses decreased by $0.8 million, or 10.1%, to $7.1 million.
• Other income, net increased by $0.5 million to $1.3 million due to higher interest earned on the balance with Westlake under the Investment Management Agreement.
• The company remains in compliance with all covenants under the OpCo Revolver and the MLP Revolver.

Negatives

• Net sales decreased by $23.0 million, or 7.5%, due to lower ethylene and co-product sales prices and lower sales volumes.
• Income from operations decreased by $3.1 million year-over-year.
• MLP distributable cash flow decreased by $0.7 million year-over-year.
• EBITDA decreased by $1.2 million year-over-year.
• Cash flow from operating activities decreased by $40.3 million year-over-year.

Risks

• The company is exposed to commodity price risk, although this is mitigated by the Ethylene Sales Agreement.
• The company is exposed to interest rate risk on its variable rate debt.
• The company's performance is subject to general economic and business conditions, including inflation and recession.
• The company's performance is subject to the cyclical nature of the chemical industry.
• The company's performance is subject to the availability, cost and volatility of raw materials and energy.
• The company's performance is subject to uncertainties associated with the United States and worldwide economies, including those due to political tensions and conflict.
• The company's performance is subject to uncertainties associated with pandemic infectious diseases and climate change.
• The company's performance is subject to the potential impact on demand for ethylene due to initiatives such as recycling and customers seeking alternatives to polymers.
• The company's performance is subject to current and potential governmental regulatory actions in the United States and regulatory actions and political unrest in other countries, including environmental regulations.
• The company's performance is subject to industry production capacity and operating rates and the supply/demand balance for its products.
• The company's performance is subject to competitive products and pricing pressures and instability in the credit and financial markets.
• The company's performance is subject to access to capital markets and terrorist acts.
• The company's performance is subject to operating interruptions (including leaks, explosions, fires, weather-related incidents, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, spills and releases and other environmental risks).
• The company's performance is subject to changes in laws or regulations and technological developments.
• The company's performance is subject to information systems failures and cyberattacks.
• The company's performance is subject to its ability to implement its business strategies and the creditworthiness of its customers.

Future Outlook

The company expects to distribute most of the excess cash generated by operations to its partners. The company intends to fund capital expenditures primarily from external sources, including borrowing from Westlake and future issuances of equity or debt. The company also intends to use the MLP Revolver to purchase additional limited partnership interests in OpCo in the future.

Management Comments

• Management seeks to maximize the profitability of our operations by effectively managing operating expenses, maintenance capital expenditures and turnaround costs.
• Management believes that cash generated from operations, the OpCo Revolver, the MLP Revolver and, if necessary and possible under then current market conditions, the issuance of additional equity interests or debt will be sufficient to meet our short-term working capital requirements and long-term capital expenditure requirements and to make quarterly cash distributions.

Industry Context

The report reflects the challenges faced by the chemical industry due to fluctuating commodity prices and demand. The company's performance is closely tied to the price of ethylene and its feedstocks, as well as the overall economic environment. The company's reliance on Westlake for a significant portion of its revenue and financing is also a key factor in its performance.

Comparison to Industry Standards

• Westlake Chemical Partners LP's performance is comparable to other midstream companies in the petrochemical sector, which are also facing challenges due to fluctuating commodity prices and demand.
• The company's reliance on a long-term, fee-based agreement with a minimum purchase commitment is a common strategy in the midstream sector to mitigate commodity price risk.
• The company's use of variable rate debt is also common in the industry, but it exposes the company to interest rate risk.
• The company's focus on managing operating expenses, maintenance capital expenditures and turnaround costs is a key factor in its profitability, similar to other companies in the sector.
• The company's distribution policy is also typical of master limited partnerships (MLPs), which are designed to distribute most of their excess cash to their partners.

Legal Proceedings

• The Partnership is involved in various legal proceedings, including environmental proceedings.
• Final settlements were reached with all of the plaintiffs to fully resolve the lawsuits related to the 2021 fire, but payment by the insurance carriers has not yet been completed.
• Westlake and its subsidiaries are responsible for indemnifying the Partnership in connection with any losses incurred by OpCo as a result of the fire.
• The Partnership does not believe that any of these legal proceedings will have a material adverse effect on its financial condition, results of operations or cash flows.

Related Party Transactions

• The Partnership has significant related party transactions with Westlake, including ethylene sales, feedstock purchases, services, leases, and debt.
• Westlake accounted for approximately 82.6% of the Partnership's net sales during the three months ended March 31, 2024.
• The Partnership has an Investment Management Agreement with Westlake, where excess cash is invested with Westlake.

Stakeholder Impact

• Shareholders will receive a quarterly cash distribution of $0.4714 per unit.
• Employees are impacted by the company's focus on managing operating expenses and turnaround costs.
• Customers are impacted by the company's ability to produce and sell ethylene.
• Suppliers are impacted by the company's feedstock purchases.
• Creditors are impacted by the company's debt obligations.

Next Steps

• The company will continue to monitor market conditions and manage its operating expenses, maintenance capital expenditures and turnaround costs.
• The company will continue to evaluate potential acquisitions and other capital expenditure projects.
• The company will continue to make quarterly cash distributions to its unitholders.

Key Dates

Keywords

Ethylene, Chemicals, Partnership, Distributable Cash Flow, EBITDA, Petrochemicals, Westlake, Midstream, MLP