8-K: Westlake Chemical Partners LP Reports Mixed Results for Q4 and Full Year 2023, Announces Upcoming Turnaround

Westlake Chemical Partners LP announced a decrease in net income and distributable cash flow for both the fourth quarter and full year 2023, alongside an upcoming maintenance turnaround that may impact future coverage ratios.

Summary

• Westlake Chemical Partners LP reported a net income of $14.3 million, or $0.41 per unit, for the fourth quarter of 2023, which is a decrease of $2.5 million compared to the same period in 2022.
• The decrease in net income was primarily due to higher interest expenses.
• Cash flows from operating activities for Q4 2023 were $107.7 million, a decrease of $14.9 million compared to Q4 2022.
• MLP distributable cash flow for Q4 2023 was $16.4 million, down $3.9 million from Q4 2022.
• For the full year 2023, net income was $54.3 million, or $1.54 per unit, a decrease of $9.9 million compared to 2022.
• Full year cash flows from operating activities were $452.0 million, a decrease of $11.7 million compared to 2022.
• MLP distributable cash flow for the full year 2023 was $62.6 million, a decrease of $13.3 million compared to 2022.
• The partnership declared a quarterly distribution of $0.4714 per unit, marking their 38th consecutive quarterly distribution.
• A maintenance turnaround is planned for the Petro 1 ethylene unit in the second half of 2024, which is expected to impact production and potentially cause the coverage ratio to dip below 1.00x.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to decreased financial performance and the anticipated negative impact of the upcoming turnaround. While the company highlights some operational successes, the overall financial results and future outlook are concerning.

Positives

• Net income for Q4 2023 increased by $1.1 million compared to Q3 2023, primarily due to higher production and sales volume.
• Cash flows from operating activities for Q4 2023 increased by $6.8 million compared to Q3 2023 due to higher net income.
• MLP distributable cash flow for Q4 2023 increased by $2.8 million compared to Q3 2023, primarily due to lower maintenance capital expenditures.
• The Partnership successfully completed the maintenance turnaround at the Calvert City ethylene unit in May on schedule.
• The Partnership maximized the margin on third-party ethylene volumes in 2023 by opportunistically timing sales.

Negatives

• The decrease in net income for both Q4 and the full year 2023 was primarily driven by higher interest expenses.
• Cash flows from operating activities decreased for both Q4 and the full year 2023 compared to the prior year periods.
• MLP distributable cash flow decreased for both Q4 and the full year 2023 compared to the prior year periods.
• The upcoming Petro 1 turnaround in the second half of 2024 is expected to cause a dip in the coverage ratio below 1.00x.

Risks

• The upcoming maintenance turnaround at the Petro 1 ethylene unit in the second half of 2024 may cause the coverage ratio to dip below 1.00x.
• Continued low third-party ethylene margins and elevated interest rates are expected to negatively impact performance.
• The company is subject to various risks including operating difficulties, changes in ethylene prices, feedstock availability, economic conditions, and weather conditions.
• The company's ability to borrow funds and access capital markets is a risk factor.

Future Outlook

The Partnership anticipates a maintenance turnaround at the Petro 1 ethylene unit in the second half of 2024, which may cause the coverage ratio to dip below 1.00x. They expect to run at full capacity after the turnaround, which should benefit the coverage ratio in subsequent years. The company also expects continued low third-party ethylene margins and elevated interest rates.

Management Comments

• The Partnership performed well in 2023 as we successfully completed the maintenance turnaround at our Calvert City ethylene unit in May on schedule.
• We also maximized the margin on third-party ethylene volumes in 2023 by opportunistically timing our third-party sales.
• We plan to perform a maintenance turnaround at our Petro 1 ethylene unit in the second half of 2024.
• Combined with our outlook for continued low third-party ethylene margins and elevated interest rates, the lost production during the Petro 1 turnaround may cause our coverage ratio to dip below 1.00x in 2024.
• However, after the turnarounds at Petro 2 in 2021, Calvert City in 2023 and Petro 1 in 2024, we should be positioned to run at full capacity, with a corresponding benefit to our coverage ratio in the following years.

Industry Context

The report reflects the challenges faced by the petrochemical industry, including fluctuating ethylene prices, maintenance costs, and interest rate pressures. The planned turnaround is a common practice in the industry to ensure long-term operational efficiency, but it can temporarily impact production and financial metrics.

Comparison to Industry Standards

• Westlake Chemical Partners LP's performance is impacted by its reliance on a fixed margin agreement with Westlake Corporation, which provides stability but limits upside potential during periods of high ethylene prices.
• Other master limited partnerships (MLPs) in the energy and chemical sectors often have more direct exposure to commodity price fluctuations, which can lead to higher volatility in their earnings.
• The planned turnaround at Petro 1 is similar to maintenance activities undertaken by other chemical producers, which can temporarily reduce production and impact financial results.
• The company's coverage ratio dipping below 1.00x is a concern, as many MLPs aim to maintain a coverage ratio above 1.00x to ensure distribution sustainability. Companies such as Enterprise Products Partners (EPD) and Magellan Midstream Partners (MMP) are often benchmarked for their ability to maintain strong coverage ratios.

Related Party Transactions

• The Partnership sells 95% of its ethylene production to Westlake Corporation for a cash margin of $0.10 per pound, net of operating costs, maintenance capital expenditures and reserves for future turnaround expenditures.
• The Partnership has a receivable under the Investment Management Agreement with Westlake.

Stakeholder Impact

• Shareholders will experience a decrease in net income and distributable cash flow, and may be concerned about the potential dip in the coverage ratio.
• Employees may be impacted by the planned turnaround at the Petro 1 unit.
• Customers of third-party ethylene sales may see some fluctuations in supply due to the turnaround.
• Creditors may be concerned about the potential impact of the turnaround on the Partnership's ability to service debt.

Next Steps

• The Partnership will perform a maintenance turnaround at the Petro 1 ethylene unit in the second half of 2024.
• The Partnership will continue to monitor third-party ethylene margins and interest rates.
• The Partnership will aim to run at full capacity after the Petro 1 turnaround to improve the coverage ratio.

Key Dates

Keywords

Westlake Chemical Partners LP, Ethylene, MLP, Distributable Cash Flow, Turnaround, Net Income, Operating Activities, Distribution, Interest Expense, Coverage Ratio