10-Q: Westlake Chemical Partners LP Reports Increased Net Income in Q3 2024 Despite Lower Sales

Westlake Chemical Partners LP saw a rise in net income for the third quarter of 2024, driven by higher third-party sales and lower feedstock costs, despite a decrease in overall net sales.

Summary

• Westlake Chemical Partners LP reported a net income of $104.1 million on net sales of $277.0 million for the third quarter of 2024.
• This is an increase in net income of $23.2 million compared to the $80.9 million reported for the same period in 2023, despite a decrease in net sales from $321.7 million.
• The Partnership's net income attributable to limited partners was $18.1 million for Q3 2024, up from $13.2 million in Q3 2023.
• Income from operations increased to $109.7 million in Q3 2024 from $86.2 million in Q3 2023.
• The increase in profitability was primarily due to higher sales volumes and prices to third parties, and lower ethane feedstock and natural gas costs, partially offset by lower ethylene sales to Westlake.
• For the nine months ended September 30, 2024, net income was $281.8 million on net sales of $845.8 million, compared to $247.6 million on net sales of $893.5 million for the same period in 2023.
• The Partnership's net income attributable to limited partners for the nine months was $47.4 million, up from $40.0 million in the prior year period.
• Income from operations for the nine months was $298.4 million, compared to $264.9 million in the same period of 2023.
• The company has postponed a planned maintenance turnaround at the Petro 1 facility from Q3 2024 to Q1 2025.

Sentiment

Score: 7

Explanation: The sentiment is positive due to the increase in net income and improved profitability, but tempered by the decrease in overall sales and the postponement of the maintenance turnaround. The company's reliance on Westlake and exposure to commodity price risk also contribute to a slightly lower score.

Positives

• The company experienced a significant increase in net income and income from operations for both the third quarter and the nine-month period.
• Gross profit margins improved substantially due to lower feedstock costs and higher third-party sales prices.
• MLP distributable cash flow and EBITDA both showed significant increases compared to the same periods in the previous year.
• The company received a substantial insurance recovery related to Hurricane Laura, which positively impacted the financial results.
• The company maintained a consistent quarterly distribution of $0.4714 per unit.

Negatives

• Total net sales decreased in both the third quarter and the nine-month period, primarily due to lower ethylene sales to Westlake.
• Selling, general and administrative expenses increased slightly in the third quarter of 2024.
• There was an unfavorable change in working capital due to timing of payments and changes in accounts receivable.

Risks

• The company is exposed to commodity price risk, although this is partially mitigated by the Ethylene Sales Agreement.
• The company is subject to interest rate risk due to its variable rate debt.
• The company's performance is heavily reliant on its relationship with Westlake, which is a related party.
• The company is subject to environmental laws and regulations, which could result in liabilities.
• The company is involved in legal proceedings, although they are not expected to have a material adverse effect.

Future Outlook

The company expects to commence the next planned maintenance turnaround at Petro 1 in the first quarter of 2025. The company intends to use the MLP Revolver to purchase additional limited partnership interests in OpCo in the future, for other acquisitions and for general partnership purposes. The company expects to distribute most of the excess cash generated by operations to its partners.

Management Comments

• Management seeks to maximize the profitability of our operations by effectively managing operating expenses, maintenance capital expenditures and turnaround costs.
• Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels.

Industry Context

The report reflects the cyclical nature of the chemical industry, with fluctuations in commodity prices and demand impacting the company's results. The company's performance is also influenced by the broader economic environment, including inflation and interest rates. The company's reliance on a long-term, fee-based agreement with a minimum purchase commitment with Westlake is a common strategy in the midstream energy sector to mitigate commodity price risk.

Comparison to Industry Standards

• Westlake Chemical Partners LP's financial performance is comparable to other publicly traded master limited partnerships (MLPs) in the midstream energy sector, particularly those focused on ethylene production and transportation.
• Companies like Enterprise Products Partners (EPD) and Energy Transfer (ET) also operate in the midstream space and have similar business models involving long-term contracts and fee-based revenue streams.
• However, Westlake Chemical Partners LP's reliance on a single major customer, Westlake Corporation, is a distinguishing factor compared to more diversified midstream companies.
• The company's gross profit margin of 42.2% in Q3 2024 is relatively strong compared to industry averages, reflecting the benefits of lower feedstock costs and higher third-party sales prices.
• The company's debt levels and leverage ratios are also within industry norms, with a consolidated leverage ratio of 4.50:1.00 or less, as required by the MLP Revolver.

Legal Proceedings

• The Partnership is involved in various legal proceedings incidental to the conduct of its business.
• 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.
• Westlake has agreed to indemnify the Partnership for certain environmental and other liabilities relating to OpCo's processing facilities and related assets that occurred or existed prior to August 4, 2014.

Related Party Transactions

• The Partnership has significant related party transactions with Westlake, including ethylene sales, feedstock purchases, and service agreements.
• The Partnership's revenue is primarily generated through sales to Westlake under the Ethylene Sales Agreement.
• The Partnership has a receivable under the Investment Management Agreement with Westlake.
• The Partnership has debt payable to Westlake under the OpCo Revolver and the MLP Revolver.

Stakeholder Impact

• Shareholders will benefit from the increased net income and the consistent quarterly distributions.
• Employees may be impacted by the postponement of the maintenance turnaround at Petro 1.
• Customers may be impacted by changes in ethylene supply and pricing.
• Suppliers may be impacted by changes in feedstock demand and pricing.
• Creditors may be impacted by changes in the company's debt levels and leverage ratios.

Next Steps

• The company plans to commence the next planned maintenance turnaround at Petro 1 in the first quarter of 2025.
• The company intends to use the MLP Revolver to purchase additional limited partnership interests in OpCo in the future, for other acquisitions and for general partnership purposes.
• The company will continue to monitor market conditions and manage its operating expenses and capital expenditures.

Key Dates

Keywords

ethylene, Westlake Chemical Partners LP, net income, EBITDA, MLP distributable cash flow, feedstock costs, turnaround, Ethylene Sales Agreement, common units, distributions