Q2 2020 Westlake Chemical Partners LP Earnings Call
During the presentation, all participants will be analysts small remote.
After the speaker's remarks will be invited to participate in a question answer session.
As a reminder, this conference call with being recorded today August six 2020.
I'd now like to turn the call over to today's host, Jeff Holly Westlake Chemical partners, Vice President Treasurer, Sir you may begin.
Thank you Michelle good afternoon, everyone and welcome to the Westlake Chemical partners second quarter 2020 conference call.
Joined today by Albert Chao, our President and CEO, Steve Bender, our senior Vice President and CFO and other members of our management team.
During this call we refer to ourselves as Westlake partners, where the partnership.
References to watch like we're Westlake chemical refer to our parent company Westlake Chemical Corporation and references to Opco referred to Westlake Chemical Opco LP subsidiary, Westlake chemical and the partnership which owns certain olefins assets.
Additionally, we refer to distributable cash flow, we're referring to Westlake chemical partners MLP distributable cash flow definitions of these terms are available on the partnership's website.
Today management is going to discuss certain topics that will contain forward looking information.
That is based on management's beliefs as well as assumptions made by an information currently available demand.
These forward looking statements suggests predictions for expectations and are subject to risks or uncertainties.
Actual results could differ materially based upon many factors, including.
Operating difficulties the volume of ethylene that we're able to sell the price at which we were able to selectively changes and the prevailing economic conditions actual and proposed governmental regulatory actions.
Got it a product some pricing pressures the koeppen 19 pandemic, our ability to borrow funds and access capital markets had a reasonable cost and other risk factors disgusting <unk> SEC filings.
This morning, what's like partners issued a press release with details of our second quarter 2020 financial and operating results. This document is available on the press release section Upper web page at W. Ell K partners Dot com.
A replay of today's call will be available beginning two hours after the conclusion of this call.
A replay may be accessed by dialing to following numbers domestic callers should dial 8558, Fivenine to 056 International callers may access the replay at four zero for.
5373, 406, the access code is 3867318.
Please note that information reported on this call speaks only as of today August six 2020, and therefore, you're advised that time sensitive information may no longer be accurate as at the time of any replay.
I would finally advise you that this conference call is being broadcast live through an internet webcast system that may be accessed on our web page at W. Ell K partners Dot Com now I'd like to turn the call over to Albert Chao Albert.
Thank you Jeff.
Good morning, ladies and gentlemen, and good afternoon to dose on the East coast.
Thank you for joining us to discuss our second quarter Twentytwenty results.
He saw picture ordinary and I'm President time.
Before we discuss the quarter I would like to acknowledge this has been and continues to be a very challenging time and our thoughts are with those affected by Colby 19.
Our first priority is to ensure the health and safety about employees.
Who continue to work diligently to serve our customers to produce essential products in these uncertain times.
Although this pandemic is creating short term turbulence, our long term fundamentals and thesis remains strong.
Turning to all funding shows in this mornings press release reported consolidated net income, including Opcos earnings of $80 million for the second quarter of Twentytwenty.
Westlake Partners' second quarter net income was $50 million.
These solid financial results are testament to the stability generated from our fixed margin exiting sales agreement for 95%, although sales and the resulting consistency of our cash flow stream.
Oh, I think facilities ran well and delivered solid financial performance was slightly lower production in the second quarter.
I would note that year to date production volumes only to approximately 2% first the same period in 2019.
Yes, I think she also agreement provides for Westlake chemical.
Yes in great rated sponsor to purchase 95% of annual planned production each year at a fixed margin does insulates us from.
Commodity price volatility and produces predictable cash flows.
I would now like to turn.
Coal, but to Steve to provide more detail on the financial and operating results for the second quarter Steve.
Thank you Robert and good day, ladies and gentlemen.
In this mornings press release, we reported consolidated net income, including Opcos earnings of $80 million on consolidated sales of $239 million for the second quarter 2020.
Westlake Partners' second quarter, net income was $15 million or 43 cents per unit.
Partnership had distributable cash flow for the quarter of $17 million or 48 cents per unit.
Second quarter 2020, net income for Westlake partners of $15 million increased by 1 million dollar compared to second quarter 2019 partnership net income of 14 million.
The increase net income was primarily attributable to the higher earnings on production sold Westlake.
The increase was partially offset by slightly lower production that apco.
Distributable cash flow was $17 million for the second quarter of 2020 increased by 1 million dollar compared to second quarter 2019, distributable cash flow.
This increase was attributable to higher earnings on production told the Westlake and reduce maintenance capital expenditures for the quarter, partially offset by lower production and increased turnaround reserve.
The partnership second quarter 2020, net income of $15 million decreased by $3 million from the first quarter 2020.
Second quarter 2020, distributable cash flow of $17 million decreased $1 million from first quarter 2020, distributable cash flow of 18 million.
These decreases were the result of slightly lower production at Opco.
The impact of this lower production was partially offset by earnings.
On ethylene sold to Westlake for the first six months of 2020 net income for the partnership of $33 million increased 4 million.
From the first six months of 2019 net income to the partnership of $29 million MLP distributable cash flow of $35 million increased $1 million from the first six months of 2000.
From last year, MLP discernible cash flow of $34 million.
The increases in net income in MLP distributable cash flow were partially due to the earnings on ethylene sold Westlake and partial offset by lower production.
Distributable cash flow had an additional favorable benefit of reduced maintenance capital expenditures for the period, partially offset by increased turnaround reserves.
Turning our attention to the balance sheet and cash flows at the end of the second quarter, we had a consolidated cash balance of $24 million.
Cash invested with Westlake chemical to our investment management agreement of 171 million.
$171 million in cash invested through the investment management agreement includes cash generated from operations throughout the quarter as well as the reserve for turnaround expenditures.
Long term debt at the end of the quarter was $400 billion of which 377 million because at the partnership and 23 million was that opco.
The second quarter of 2020, Opco spent $8 million in capital expenditures.
For the second quarter of 2020, we maintained strong leverage metrics with a consolidated leverage ratio below one times and a net to capitalization ratio below 25%.
The turnaround of our Petro to ethylene unit was originally scheduled to occur in September 2020.
Due to the continued strong performance of Petro too and in order to reduce koby at 19 risk to employees and contractors. The turnaround has been deferred until the first half of 2021.
We are continuing to finalize our plan for the turnaround and we will provide further details of the turnaround Petro to cracker later in 2020.
Cost of this turnaround has been included in the amount we charge Westlake chemical for ethylene that's expected to be fully reserved for at the commencement of the turnaround.
The partnership's predictable fee based cash flow continues to be an attractive attribute in todays uncertain economic environment.
Given the predictability of our earnings and cash flows and continued market dislocation, we have kept our distribution consistent with prior quarter.
Our cash flow will allow the partnership to continue distributions at current level, while maintaining our targeted 1.1 times distribution coverage, thus eliminating the need to access the equity capital markets.
We will continue to evaluate evaluate market conditions in future quarters, NSS, when and how we apply our for growth levers.
On July 30, Onest 2020, we announced distributions of 47.14 cents per unit with respect to the second quarter.
An increase of approximately 3% over the second quarter 2019.
Since our IPO in 2014, the partnership has made 24 consecutive quarterly distributions to unitholders and we have grown distribution, 71% since the partnership's originally original quarterly distribution of 27.5 cents per unit.
For the 12 months ending June Thirtyth 2020, distributable cash flow provided coverage of 1.13 times the declared distributions.
The second quarters partnership distribution, we paid on August 24th 2020 to unit holders of record on August 10 2020.
Now, let me turn the call back over to Albert to make some closing comments Albert.
Thank you Steve.
We are pleased with a partnership solid financial performance.
Our ability to continue to deliver strong production volumes.
As Steve mentioned with slightly lower ethylene production in the second quarter.
Well production was lower versus the prior year period remain confident that 2020 as a whole will be strong production year delivering solid financial performance.
I will look for ethylene remains strong and our parents Westlake chemical has seeing improving market conditions that began in may and continues to present time period.
We believe the predictable fee based cash flow structure from his take or pay contract with up haven't what's the chemicals for 95% of Opcos production provides a stable and predictable cash flow.
It's predictable cash flow should be an even more attractive investment thesis in todays uncertain economic.
And that can market volatility caused by covered 19 as well as the low interest rate environment.
As Steve outlined awfully difficult cash flows provided ability to sustain our existing distribution.
All relying on external sources of capital.
Does providing us with greater fixed flexibility in this environment.
This also provides us the ability to optimize growth in distribution and financing decisions. Then we'll have a beneficial impact to our unitholders.
As the market condition recovers, we anticipate the strong financial attributes will be better reflected in the unit price of the partnership.
We have maintained strong balance sheet with conservative financial and leverage metrics.
As we continue to navigate the evolving market conditions, therefore returned to a normalized market, you'll evaluate opportunities via all four levers of growth, including increases of ownership interest of Opco acquisitions of other qualified income stream such as West lakes interest in the L. HCC ethylene cracker.
Organic growth opportunities such as expansions of our common ethylene facilities.
And negotiations all the higher fixed margin and selling sales agreement with Leslie.
As market dislocations correct.
And to Utilizations of the aforementioned for leaders. We believe we have the capability by continuing value to argue that hold us over the long term.
As always we will continue to operate safely along with being good stewards of the environment and commodities in which we live and work.
Thank you very much for listening to our second quarter Twentytwenty earnings call now I'll turn the call back over to Jeff. Thank you Albert before we begin taking questions I'd like to remind you that a replay of this teleconference will be available starting today at two PM Eastern time.
Michelle will now take questions.
Ladies and gentlemen to ask a question you're wanting to press Star then wondering your telephone to.
Well move yourself from the Q. Please press the pound Kate.
Our first question comes from Iran Viswanathan.
RBC Your line is open.
Good morning, Thanks for taking my question.
Good morning, well.
Thank you too.
On vinyls.
Maybe just give us your perspective on the caustic market. We had several months of increases and then we saw.
A downtick here in July.
The caustic market is.
They are going up or down so do you expect I guess continued declines here as.
The operating rates and finals operating rates continue to.
To remain relatively high or do you expect operating rates there to come down later in the year on construction and maybe caustic regained some pricing momentum are you thinking about that tradeoff.
No route as you know the caustic market is not as seasonal as the TVC market and so certainly we have seen price announcements and demand strength in PBC. So that does pull on more chlorine, which puts more cost into the market. So while we've seen price nominations starting in February March and April by the interest.
Tree totaling 160 to $195 a ton.
No. The answer to your question is highly dependent upon how we see the manufacturing industrial demand recover and whether it recovers more strongly or not will really drive whether we're able to see further traction.
In caustic pricing during the course of 2020, so as we look forward, we're certainly seeing strength in PBC and therefore, our stronger pull on chlorine and you're right puts more cost in the market, but the real strength in caustic will be very dependent upon how quickly the industrial manufacturing side of the economy picks up and begins to fully.
More fully recover.
Alright, great. Thanks, that's helpful and then maybe I'll ask the same question.
Both inside.
PE looks like momentum has remained relatively positive here.
Again, maybe because of the export window is now open and demand is relatively robust on the packaging side. So.
Hey, I guess do you expect all of those dynamics to continue and that's.
The olefins chain to continue to get pricing or.
You see kind of typical destocking in August in December maybe resulting in.
No.
So in some price declines.
We've seen continued strength net strength really goes back to the earliest parts of.
The year and so.
As we've seen price traction in.
Really beginning in June and coming through July with now price combinations of five cents in polyethylene in August.
The operating rates reflect that strengthen pricing I think the chain is is not is fairly tight it's theres not a lot of excess inventory in the marketplace and so I think there is very good traction in operating rates being elevated and traction in pricing. So we'll see how the market plays out its early August but we've seen.
Very good strength earlier, so far in the quarter in July So, we'll see how the rest of the year plays out.
Thanks.
You're welcome.
Our next question comes from Mike Lisa Barclays. Your line is open.
Great. Thanks, guys and apologies from us in the fall.
Our.
But I guess just one question from me today on the distribution. If we look we've now been steady for the past couple of quarters and I appreciate your constantly evaluating it.
But just trying to get a sense when you look at this or when you evaluate keeping it steady versus increasing or decreasing it gives us a better sense are you looking for a better.
Partnership yield right now in the market are you looking for a better relative yield versus peers.
How do you frame that internal dialogue around kind of distribution.
Level today.
The market continues to be and we've seen this across.
Many of these midstream players.
In the MLP space continues to be fairly dislocated and I think we're certainly looking to see a better and more normalized market before we kind of assess how we move forward with distributions. So when we think about the poor levers of growth that we have theyre, all imminently actionable, but we certainly need a value.
Opposition, we've got about at 10% yield, let's say and certainly we need a.
I think a valuation that is more reflective of the stability within clearly able to demonstrate.
Stability of cash flows the stability of earnings through the last six years and even through this most recent period and the most challenging time or many industries, we've been able to very clearly demonstrate the stability of the business.
I think in a very low interest rate environment and potentially with.
Tax rates will likely to rise that.
Vehicles like this should become very attractive and so as we see the markets begin to stabilize.
And begin to assess how we reward investors I think that those are the kinds of conditions, Mike we're looking to to see.
Great. Thank you.
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Our next question comes from Matthew Blair of Tudor Pickering Holt Your line is open.
Thanks, Good morning, Albert and Steve.
Well again I think.
So the release mentioned lower ethylene production to Opco in Q2, I know you said year to date production was down about 2%, but can you offer new sort of commentary on upgrades in Q2 and as you look into Q3 do you think the higher operates abuse.
Tailwind to the partnership.
So during the quarter Westlake chemical did elect to receive fewer pounds of ethylene, but as you know we've moved the turnaround into 2021, and so I fully expect that production will be.
In line with production that we all we saw for the second half of.
20 in line with the second half of 19.
Because we don't have that planned turnaround now in 2020, and so as we see and as you know well Matthew we have a contractual obligation to too.
Receive payment for that ethylene whether Westlake chemical takes that are not during the course of the year. So it's an annual nomination and we're very comfortable that Westlake chemical we'll take that ethylene and having pushed the turnaround into 21. There is no reason why we should see a reduction of pounds over the course the year.
Sounds good and then on paper it looks like spot ethylene cracking margins have improved so far in Q3, No told me 5% of your sales but.
Would you expect to realize that in Q3 or their timing lags or I guess any other factors, we should take into consideration.
Now there are no timing lags per se, we're selling it in the merchant market and so as we see the merchant market evolve that 5% that sold into the market is realized accordingly.
Great. Thank you very much you're welcome.
Our next question comes from Eric Cherry of Citi. Your line is open.
Hi, good afternoon, Albert and Steve.
Ill.
Are you considering expanding petro to during the upcoming first half 21 down downtime at believes the last time you expand the capacity was roughly 120 million pounds back in 2013.
Yes, Theres no de bottleneck or expansion plan for this maintenance that will undertake and 21.
It's just a maintenance outage.
And then just in terms of qualitative statements you know your earnings in the quarter for Westlake were roughly split between all those things and vinyls are you more positive on the vinyl cycle or the olefin cycle in second half and going into 2021.
Well as as you know well these.
Supply demand balance is quite different.
In the two chains and so certainly we've seen strength in the construction markets beginning earlier this year and even during the course of the pandemic, we've seen strengthen our building materials businesses and pipes fittings and siding.
So we think that excuse me given the supply demand balance in the vinyls chain and the strength that we have an hour vinyls products business further downstream that we're very well positioned in the vinyl cycle.
On the ethylene polyethylene chain, we think we're very well positioned given our specialty orientation, but we certainly you have seen a line of capacity come in over the last several years and that certainly has weighed on margins.
As new pounds of come in and of certainly we've seen.
I think date.
Illustration of the strength given our specialty portfolio that we saw in the second quarter.
Helpful. Thank you Steve you're welcome.
Again to ask a question. Please press Star then one.
Next question comes from Steve Byrne with Bank of America. Your line is open.
Yes. Thank you and let me also apologize for missing your earlier call. We were relying on Bloomberg timing and we were off an hour so sorry about that.
Acute notorious James here.
My questions more relevant to your two year crackers.
For that.
New locate cracker I just wanted to ask.
How has it been running and was it builds with.
You know and expand the infrastructure and foundation to make it relatively easy to add additional furnaces to increase the capacity over time.
So Steve the plants been running very reliably we're pleased with the operating performance of the of the unit.
And so.
Please to see that and certainly as you have seen in the industry.
Pre installation of certain components of the plan allow you to have cost effective de bottlenecks should you choose to do that and should the market be indicative of the economics to take those actions.
Naturally you wouldn't do that until you get to a normal time period, we're going to bring the unit down for maintenance and such but certainly there were some opportunities to install certain piece of equipment that would make it cost effective should we choose to in the future de bottleneck that unit.
And we'll just kind of a high level question about fear about your crackers.
Obviously, the target molecules ethylene then there are some byproducts, but theres a fair amount of hydrogen that comes off these crackers and I.
I'm, assuming it's it's uses a combustion fuel for you.
20 cents, a kilogram and I'm sure you're aware of.
Of the focus.
Many many jurisdictions or.
A different color of hydrogen David Gray and I just wanted to know whether your thought through whether there's any alternative use for the hydrogen and if you generated another revenue stream from crackers would.
We encourage you to to reflect potentially as one of the levers you can pull on increasing the value proposition to the partnership.
So we see we certainly do look at times of using.
Hydrogen at a higher value and not just as fuel, but selling that back into the merchant market that back to your earlier question about green or gray hydrogen certainly those are tend to be thought of in terms of coming from more green base.
Renewable applications not necessarily based on on gas.
Or other NGL and so.
It's something that we're looking at them paying attention to but it's something that we'll just have to see if theres an underlying value stream long term, if we want to look at doing anything on that front more broadly.
Steve I mean, it also that we produce hydrogen from all three alkali cells.
So we produce not a whole level now the costly you do electrolysis on.
All sold Brian to make chlorine caustic this water in this whole, Brian and they turning to hydrogen as well.
So we do produce hydrogen fall.
Paul type trend as well as ethylene plants. So we are all yes, and we want to enter into the hydrogen colony and we away to us to supply to with today's production without adding any more capacity.
Very good might not big screen could be a different color but.
Yes sounds interesting thank you.
But we could buy.
Renewable power that we've become green.
Following the call select plants, yes.
Thank you Paul Thank you for interest appreciate it.
At this time, the Q and they session is now under I'll now turn the call back over to Jeff Holly.
Thank you again for participating in today's call. We hope you'll join US for next conference call.
Yes, our third quarter 2020 results.
Thank you for participating in today's Westlake Chemical partners second quarter earnings Conference call. As a reminder, this call will be available for replay beginning two hours after the call appendage.
A replay can be accessed by calling the following number.
Good callers should dial 855859 to your five six international callers may access the replay at 44 five through seven 340 sick.
The access code 3867318.
This will now conclude today's call goodbye.
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