Deutsche Bank 7th Annual Global Industrials and Materials Summit

Jun 8, 2016

Slides

Thank you. Next up is Westlake Chemical. We have with us today, Bruce Robertson, the Assistant Treasurer of Westlake Chemical. Bruce has some, remarks to go through and he'll go into the Q and A session of the presentation. With that, Bruce, it's all yours. All right. Thank you. Good morning. If you don't mind, I'm just going to give this a test run and make sure. Okay, it is working. Good. Westlake Chemical Corporation. Westlake Chemical Corporation is an integrated chemicals and plastics manufacturer materials company in olefins and vinyl sector. We have our mission statement includes that we pursue profitable growth. We create and grow value for our shareholders, focused on businesses we understand. We do business globally in areas we can gain an edge, and we act in a financially disciplined manner and opportunistic in our investments. Our olefins business is approximately 67 of our EBITDA as you see here. Main goal is our main product is polyethylene. Polyethylene is the largest plastic produced in the world, ideal choice for countless nondurable applications. Our vinyls business makes PVC, and PVC is the poor man's plastic. Its unique set of properties make it a plastic of choice in many consumer durable goods. Strong value creation and profitable growth is the story of Westlake. Again, we have this illustrates the Westlake's capacity growth from the inception from '86 through our planned 2017 capacity expansion in Calvert City, Kentucky. Note that we achieved this growth both through acquisition and organic expansion. At Westlake, we're looking to ways to grow the company, not just ways to grow, but to strategically grow the company and a prudent use of our strong balance sheet. As you can see, the yellow bars as they spike up there, those are our expansions in our Petro one unit currently underway at Lake Charles and our planned Calvert City expansion to take place in 2017. The key drivers for future earnings, we're going to take advantage of our position in the shale gas, low ethylene, low feedstock price. Our NGL feedstock is the key driver for both of our segments. We're planning again two more expansions, as I mentioned, Lake Charles and our Calvert City, Kentucky facility. Upon completion of these expansions, we will improve our integration cost structure and leverage the NGL advantage we see in North America. We are focused on the profitable and large growth LDPE product in our downstream polyethylene business, and we are actually the largest LDPE manufacturer in The Americas. Our acquisition of Ventolin in 2014 is the global leader in the specialty PVC business positioned us with more profitable product mix of PVC, provides geographic diversification, increased distribution and access to extensive R and D technology. This financial strength and flexibility we have provided the ability to fund these important investments and provide the platform for future growth. Also in August of twenty fourteen, we launched our MLP, Westlake Partners, to leverage the low cost of capital to achieve the future growth. This describes our integrated chain in The U. S. For an enhanced margin position. We are fully integrated in our olefins business and our olefins chain from ethylene to polyethylene and styrene is shown in the green boxes. We are also one of the most integrated vinyls producers in The U. S. And possibly one of the lowest production cost locations globally as shown in the gold boxes. Chlor Alkali facility in Geismar, Louisiana completed our chlorine integration in 2013, and we completed a feedstock conversion expansion in Calvert City in the first half of twenty fourteen and have another expansion planned in 2017, as I mentioned, that will add additional 100,000,000 pounds of ethylene capacity in 2017. We're currently debottlenecking our Petrol One unit at Lake Charles, Louisiana for another $250,000,000 pounds of ethylene capacity, which when combined with Calvert will give us three fifty million pounds of new ethylene capacity by 2017. And upon completion of these, we will be fully integrated for ethylene. We will be perfectly balanced with ethylene for our current configuration of ethylene down to the vinyl segment. A significant part of our PVC, as you can see here, also goes to making building products. Did you want me to take any questions along the way? Do you want me to just go and Okay. Finish Moving along here, we have the just the NGL feedstock flexibility and infrastructure. Charts in the upper right show that almost two thirds of the world's polyethylene not polyethylene, ethylene production is from oil based feedstocks. In contrast, all of our plants have the ability to use ethane as a feedstock. We also have some plants that are also dual fuel. Our facility in Calvert was recently converted from a propane to ethane. And our Petro two unit in Lake Charles has the ability to burn, again, butane, propane and a little bit of naphtha. The chart in the middle right shows the flexibility which we have regarding that. We can go from all ethane feedstock to mix the feedstocks. And this ability to burn different feedstocks allows us to adapt our feedstock needs to the current market conditions. The chart on lower right shows the twenty fifteen Western Europe industry feedstock by product. Our Ventolin subsidiary in Europe provides further diversification to our feedstock requirements. The large supply of ethane and NGLs in The U. S. Is available to us via the expanding pipeline network illustrated in this chart in the top left. This chart shows the growing infrastructure being added to deliver ethane and NGLs to the Gulf Coast. This is in addition to all the capacity that has been added in the last couple of years. Additional capacity added from the Northeast Marcellus region will be a significant supplement to the current supply from the Gulf Coast and Mid Continent. Our Calvert City facility is benefiting from its access to ethane and NGLs from the feedstocks pipeline and storage facilities that we have in place with new feedstocks in Northeast being delivered via the enterprise product ATEX pipeline. We are also expanding one of our Lake Charles crackers, as I mentioned, and the twenty seventeen further expansion of the Calvert City facility is also included in our expanding ethane and NGL advantage. This is the polyethylene slide for the product mix. This shows the global demand, Westlake capacity and what we produce and what those margins are between the various grades we produce. We are focused on the profitable product mix in our downstream polyethylene business. Global PE capacity today is approximately 195,000,000,000 pounds and is composed three types of polyethylene, namely low density polyethylene, LDPE, linear low density polyethylene, LLDPE and HDPE, high density polyethylene. Referring to the two pie charts on the left, LDPE represents approximately 23% of the global market, whereas it is 58% of our capacity. The right chart shows that over the last fifteen years, LDPE has the highest margin of all the PE products. LDPE has averaged $0.78 per pound more than LLDPE and 4.5% more than HDPE during the years 2001 to 2015. According to the 2016 IHS prices, LDPE had approximately $0.94 per pound margin advantage over LLDPE and $0.67 per pound advantage over HDPE from 2011 to 2015. Thus, our recent average margin per pound of PE would be in line with those historical industry averages. This focuses on our most profitable production, our LDPE. Is driven product advantage differentiates us within the PE industry. Our chart on the left shows that Westlake is the largest LDPE producer in North America. And more importantly, the chart on the right shows that the Westlake has the highest LDPE product mix to total PE capacity percentage in North America. Product differentiation will be an important factor in the period ahead as new capacity additions are added. Sticking with the global polyethylene, the three productions and the world capacity and growth. Global polyethylene additions will add capacity throughout the rest of the decade and should find its way to markets, primarily in Asia and Europe as these markets represent the best netback markets for these new products. Global polyethylene demand tends to grow between one and 1.5x world GDP growth rates, forecast as global low density polyethylene capacity additions may not keep pace with growth in projected polyethylene demand. As you can see by the yes, the purple and the LDPE, those are those you see some spikes in 2013. Those were some additional worldwide capacity additions, specifically focused on the LDPE, where you see that is the kind of the purple box. Those additions in 2016 to 2021 were primarily based in Asia. This is our this further differentiates ourselves from the LDPE market, the autoclave versus the tubular. The autoclave, as you can see, is a more specialty type product and the tubular, of course, is more commodity. The product mix has a broad and narrow. What that means is the applicability of ours, where I think the correct me if I'm wrong, I think the tubular LDPE has like somewhere between 50 or 60 applications, wherein the autoclave can have up to two fifty or more different applications. The supply demand, as you can see, that's being added. World demand in twenty fifteen, twenty twenty, most of that is in the tubular sector. We while we're in the autoclave sector, a differentiation between the two processes is primarily pressure. It's very high pressure that then yields a very high quality product on the LDPE, the autoclave versus the tubular. As I said, we focused on autoclave LDPE, which is 80% of our LDPE capacity compared to the global average of 38%. With very little new autoclave LDPE capacity being added in the world and with growing demand, the market for this specialty LDP could continue to tighten in the future and expect that it will. Again, because of our integrated status and position as far as taking it the ethane, the ethane and the ethylene position, low cost producer of PVC, again, assisted by our high integration. This chart shows that integration in the vinyl segment, while most vinyl producers are integrated into chlor alkali, they are not integrated into ethylene. Importantly, the majority of the margin in the vinyls chain is in ethylene and chlor alkali. This illustrated the value of being more fully integrated. We have divided the historical margins of vinyls into chlor alkali, ethylene and PVC. Of the value of the vinyls chain, in the years 02/2015, most of that value, was in the chlor alkali and ethylene claiming a combined 91% of vinyls margin with about 9% of the margin in the PVC resin manufacturing process. The pie chart that's in the upper right lower right shows that the typical industry margins look like from 2010 to 2015. As you can see, the majority of the margin over this period is in ethylene, representing 50% of the margin, up from the 39 on the top. Through upstream integration in chlor alkali using shale gas based power and ethylene gas shale and ethylene using shale gas based ethane and NGLs makes Westlake one of the lowest cost producers in the vinyls globally. Therefore, leverage this low cost position for Westlake Chemical, It would grow its vinyls margins by maximizing chlor alkali production and seeking to maximize its ethylene availability to produce and sell PVC. Glowing global PVC demand, just a few words about that. Demand has increased by over 30,000,000 tons to over 40,000,000 tons over the past ten years and is projected by industry consultants to reach about 50,000,000 tons by 2020, driven by construction and infrastructure requirements in emerging markets around the world. The low cost of natural gas to produce power for the production of chlorine and low cost of ethane to produce ethylene provides North America PVC producers the advantage to continue exports to emerging markets to satisfy the growing demand. The next I want to kind of go to our new footprint over in Europe, Benelit, the acquisition in 2014. We now have this global PVC presence with facilities in North America, Europe and Asia. The Asia one, will talk about in just a little bit. North American operations are currently benefiting from integrated low cost production, as I mentioned earlier. And now we now have a European facility, Vinylit, that is a leading producer of specialty PVC. We also have a vinyls facility in China referred to as Hwasu. We were one of the early entrants into the Chinese market. The Huazhu facility owns a PVC resin plant and is integrated into downstream fabrication product fabrication facilities such as PVC film and profile facilities. The facility makes one of the highest quality PVC resin and film in China, serving major domestic and export customers. Further, this slide shows where we are standing as far as the PVC specialty PVC manufacturing goes. And with our acquisition in 2014 of Ventolin, can see that the combined, we are the number one supplier in this space. In relation to other PVC producers around the world, Westlake is largest global producer in the specialty PVC market, which brings better margins than commodity PVC. The improved distributions, especially to emerging markets, is very important. If you're wondering what specialty PVC is, it's the production of things like blood bags, special hospital use. It has to do with making wallpaper vinyl wallpaper. It has to do with the undercoatings for automobiles, soundproofing, any kind of insulation for large large equipment. For you BMW and Mercedes owners, your faux leather seats is Vinylip product. Probably, 80% chance it will be. But their product is what goes into making those. It's the soft rubber around your cable. And when you have cable and you got a kind of squishy feels like plastic, that's their product. A little bit further about Ventolin, I just went through some of their production which they have. It's a comprehensive. This shows where they're located. They are headquartered in Izmanning, Germany, outside of Munich. They have various production facilities as you can see there and sales office. And by the chart you can see the differentiation between production and sales office. We're now going to talk about the being financially disciplined. If you know Westlake, you know that we have a very strong balance sheet, very conservative. And I'm also going to touch on our further talk about our MLP, Westlake Chemical Partners. Again, the strategic and efficient investment capital, a key element in our philosophy is the prudent reinvestment of capital and is the realization of an efficient return on this investment. The chart on the left shows that we have prudently invested in the business through conversions, expansions and new facilities, and we have added additional capacity planned for twenty sixteen and 2017. On the right, you'll see that we have achieved the high growth in gross profit through the efficient use of capital versus our peers over the five year period. On the left is, again, the acquisitions, the expansions and the debottlenecks. Also, we're going to add be adding to that the Lake Charles and the Calvert City expansion. Lake Charles currently is going on now. The plant is shut down and going through a turnaround. Calvert City will be most likely early twenty seventeen. Disciplined approach to spending and the competitive factors rank Westlake among the top of our peer group and returns. The left part of the bar shows we're putting these assets to work much more effectively than our peer group and generating returns above our peers. The bars on the right show our average EBITDA margin is better than our peers, and we attribute our superior bottom line results in our operating philosophy and execution, specifically focused on growth and expanding our chain integration, advantaged feedstock and our product mix. Again, kind of boasting about superior balance sheet superior balance sheet and liquidity. Table on the left reflects net debt to net cap ratio of about 11.5% with negative 11.5%, by the way, which is well positioned to support the growth and grow the business. The balance sheet shows our capitalization and also illustrates how our conservative financial practices allow us to make strategic acquisitions where the opportunities arise. The chart on the right shows debt to total cap over the ten years, and you can see that Westlake has consistently been less leveraged than the peer group. Yet during the same period, we continue to deploy billions of dollars of capital in our business and profitably grow our business. We didn't overextend ourselves as some did during the same period. The messages here are that we have ample ability to fund continued growth and we have the patience and discipline to invest when the risk award trade off presents itself. With that, that is the end of my prepared remarks. Strategic investments drive the EBITDA. You can see over time, how we've grown the EBITDA through these acquisitions, timely investments and of course, our entree into the specialty PVC market. Talking about the Westlake Chemical Partners. Westlake Chemical Partners is a very important part of the capital structure of Westlake Chemical. We have at IPO, we dropped down one piece. We also have a second dropdown that occurred, I think, last year, which takes the partners' interest in OpCo to 13.3% as you see. It has the assets in OpCo were dropped down, were the crackers in Lake Charles, the cracker in Calvin City and the pipeline that goes from Mount Bellevue to Longview, Texas, where we have some polyethylene plants situated. We can grow obviously the growth in MLP in our structure is one which will be dropped down additional ownership interest in OpCo to the MLP over time. But there are other levers that we can use. We can grow organically, which we are now. Actually, our expansions of production capacity in OpCo with the Lake Charles and the Calvert City expansions will give them increased growth ability. Where there's a significant capacity for further organic growth. We can do additional drop downs. We can do M and A activities from either the MLP alone, MLP and Westlake together, or Westlake has the ability at some point if it wants to chooses to, to acquire the asset and drop it down into the MLP. And also last but not least, the not least, but most important is that there is a contract between Westlake Chemical and OpCo. And what that is, it is a tolling arrangement. It's a great all the commodity exposure is at C Corp. And all that OpCo does is actually produce the ethane. Westlake Chemical buys the ethane, delivers it to OpCo. OpCo processes in ethylene. Ethylene is then delivered back to Westlake Chemical. And for that, recover all of their operating cost and maintenance and turnaround cost plus $0.10 a pound. $0.01 0 a pound for everything which they deliver back to us. So that when it says the last bullet says extend ethylene contract and negotiate higher ethylene margins, that higher ethylene margin could be higher than $0.10 a pound. Thank you. Bruce, thank you very much for that presentation. I'll lead off with the questions. If there are any questions in the audience, please raise your hand. Bruce, first, why in chlor alkali and PVC, why is that or why are those attractive chains to invest in? Well, I'm going to go back to the slide, I think that best shows that is right here. You can see where the actual margin has been moving from ethylene, then the ethane to ethylene crack. It then moved to PE. PE was strong and now what we're seeing is that that margin is extending itself down into the vinyls area. And this shows that since 2010, 2015, which is true today, a matter of fact, that green is actually getting bigger. The ethylene piece of that margin in the vinyls industry is getting bigger. So the more that you can expand your ethylene margin into the vinyls area, the more profitable we're going to be. So that's the interest is backward. If you want forward integration or backward integration, however you want, but it is to get that ethylene piece in green as large as possible because you never know where that margin is going to be. It could be in the crack. It could be in PE. As I mentioned, right now, moving down to the vinyl side. Understood. We have a question from the audience. All right. Thanks for taking the question. Just looking at the slide on the corporate structure, so that I understand it Is this the OpCo one? Right. Okay. Just so we are there you go. So the eligible assets for dropdown are currently those listed under the OpCo column. Is that correct? Yes. And would the Westlake assets ultimately be eligible for dropdown as well? No. No. That's why they're there. If they were eligible, they'd be on the left hand side. Okay. And in terms of managing the distribution of Westlake Partners, given the cyclicality of the industry, how do you look at potentially cutting distribution in recessionary times? We don't. Okay. Our objective is to have low double digit growth of distributions over the life of this MLP. And we accomplished that well, right now, it's the $0.10 per pound that's paid to OpCo, but also over the next period, maybe a year, one point five with the incremental capacity additions within OpCo that will grow that $0.10 margin plus other they have 95% of the capacity in OpCo gets to $0.10 a pound. So you're raising it by 3 50,000,000 pounds so you're going to get more $0.10 distribution on that, plus they're able to sell 5% to the third party market of their byproducts. So they have other means of income and revenue on that byproduct at 5% that's not included in the contract. Bruce, there are growing about The U. S. Ethylene cycle in terms of potentially ethane prices moving higher, giving increased U. S. Exports and increased demand, new capacity, plus the impact of this new capacity on ethylene polyethylene margins. How do you respond to those concerns that you may that the peak of the cycle may be past us and about these growing concerns going forward? I think the ethane while ethane prices have moved up, there is some concern that they will move into the probably high 30s into the $0.40 area. I would it's our belief that once those prices approach the high 30s or 40s, I think that you'll see that we think that that's enough to spur either reignite development in those fields that may have had shutdown production in the past or for new production to begin in some of these less cost areas, the Permian Basin being one. I was in Orlando last week and of course the midstream guys are very concerned about what the price of ethane is or is not going to be. They were calling for prices in excess of $0.40 but they weren't calling for it that they would be that. I think they were referring that they would like to have that $0.40 or $0.50 because really at $0.40 we believe that firmly that, that will actually spur capacity additions as far as reigniting production from some of those shutdown wells. And you do have the DUCs out there that can come online very quickly. Again, ethane versus where you think the price of oil is. If you think that ethane is going to get high, you have to look at that in relation to oil. And if oil stays at $50 or higher, I think you're going to see that production come online anyway. So those rejection levels will stay high. That's in general what our views are. In terms of new capacity coming on stream really starting 2017, 2018 in terms of the ethylene polyethylene capacity, how will that impact do you think U. S. Ethylene polyethylene price and margins new supply comes on stream? I think it really depends on how those facilities come on. And when I mean how, I mean in two ways. One is really when they will come online and how they come online and what markets they intend to serve. How meaning is that when are they going to start up? Are they going to start up partially? Are they going to wait until the entire units are complete, the derivatives are complete to bring them back on? And it really is a tricky startup situation. These are sophisticated units that if you're integrated with your polyethylene units, you really need to sync those up very well. Not to mention that just the ethylene cracker, the ethylene cracker itself has got its own issues with heat, pressure, making sure the quality of the feedstock coming in, making sure that the product going out is right. You get furnaces you need to fine tune. So it could take a while for these all of these units to be up and running at maximum capacity. Just kind of back up a bit, to to get a plant up and running at full capacity, you don't go from zero to 95 or 98. You just kind of bring it up to 25, 30 or lower and kind of stage these things. And I have been in the energy sector for at least forty two years and I can tell you I've never seen one go from as they say zero to 100 from smooth run. Everything's got issues, everything's got problems. If nothing else, they'll bring them down just to fine tune everything, make sure everything is all in sync as you ramp this machine up. Some of them, most of them I think, and I'm not the expert here, but I think some of them are actually destined majority of output of their ethylene will be commoditized in PE and most of that PE will find its way to the international markets. Some of that ethylene capacity of these new plants, we believe will be destined for The U. S. Market. We think that some of these ethylene manufacturers will seek to place some of their ethylene into The U. S. Market and they would like to do that on a long term contract. So what I see is, I see the ethane prices, these units come up and if they come up on a planned stage, ratable basis, I think that the ethane price is going to have some fluctuation in it. But I think there is plenty of supply to handle all of the current ethylene facilities, are coming online. I think that there may be some excess ethylene capacity showing up in the markets probably in 2018, 2019. And so I think that the price of ethylene may soften a bit, but I still see it as domestically domestic demand being strong. It's going to be those guys that are going to the international sector that when they start up, they really have to keep going. So I think that ethylene itself is going to remain firm. Very good. Any more questions? I don't know if that answered your question. Any more questions from the audience? And I'll keep on going. Bruce, construction costs, we sort of staff both week, increased the cost of their project from 9,000,000,000 to $11,000,000,000 You're doing more ground expansions. But what are you seeing in construction costs right now in your U. S. Project? Construction costs are ever increasing in the Gulf Coast area. We're finding that the Greg, again, it starts with the current turnaround trend. Know that some of these units some of these owners actually deferred some of their turnarounds. So the actual turnaround season has been elongated. You have a number of these plants, which are still going on being built in the Gulf Coast area. There's Exxon, there's I think there's OxyChem, I think there's maybe two others that actually have active construction in their sites. And so it was tight before now. It's even tighter now. It will get even more tighter as this goes on. So if one hasn't already signed those contracts and really employed them or given a definitive date, I think most of the ones that are not beginning hard steel in the ground, I think those will be deferred. I think that those construction costs will go up. I think the Sassoil's announcement of a $2,000,000,000 I think it was $2,000,000,000 increase in their plant is a perfect example of what is actually going on in the minds of those that are still kind of planning theirs. They see this ever increasing labor cost and cost of construction. So it's going to get tight. It's going to get tighter. And until I think some of these ethylene plants start rationalizing how big they're going to be, when they're going to come on, I think we're going to see continued labor prices go up in the Gulf Coast area. Now on the ethylene side, you've chosen to do brownfield expansions rather this latest round of expansions at Petro 2, Calvert City, have you pretty much maxed out expansions on existing? For major for the two fifty million dollars $100,000,000 type, yes, we have. I think that we could actually squeeze some more out of our units by maybe fine tuning some furnaces around the edge, some input and some output adjustments. But as far as the larger expansions, I think this is going to be it. Right. And a couple of other issues, I don't know if you touched on, but the few with Eastern Chemical on the pipeline tariff? Still in the court, still before the Texas Railroad Commission. We've had some decisions that were made in the courts that have since been reversed. We've had some other views. Someone anyway, let me just say this. It's still before the courts. It's still before the Texas Railroad Commission. I wish I had wish we all had an idea as to when it was going to be complete, but we don't have a sense of that now. Leslie, is that the MLP given the potential IRS ruling that we've waiting on the team to report? The IRS, if you don't know, in last year, came out with proposed regs. Everybody thought it was going to be fine tuning kind of around the edges. What it was is they a baseball bat and just kind of took kind of got beat to death. What they did was basically said that plants MLPs such as ours that will no longer be qualified as the MLP going forward. We expect we've now educated. We've done all that we think we can, could and should do. We've educated them. And we expect the decision before Labor Day, which means like today before Labor Day. So it could be any time. Excellent. Well, that will end it there. Bruce, thank you very much. And Thank have a great day. Yes. Thanks.