08.25.17
Chemicals
Hurricane Trade Winds
• Category-2 Hurricane Harvey bears down on US Gulf Coast. Given the concentration of commodity chemical assets on the US Gulf Coast, we have written many hurricane-related research notes in our career. Fortunately, we have not been compelled to do so since 2008, when Hurricane Ike hit Texas as a high category-2 storm. Our first thoughts are always about the safety of people in the path of the storm. That said, with Harvey having strengthened rapidly yesterday, we take this opportunity to consider what this potentially devastating event could mean for chemical stocks in the days to come. Recognizing many uncertainties ahead of landfall this evening, we offer in Table 1 our preliminary assessment of risk and opportunity, purely from a stock perspective. The potential for impact remains fluid at this stage, so we will need to continue to assess market developments in coming days.
• It’s not the wind, it’s the humidity. By way of background, petrochemical plants are engineered to withstand hurricane force winds, so direct wind damage to plants is more the exception than the rule. In our experience, the primary risk tends to be...
• Supply restriction often leads to upward tension in commodity prices. At this writing we see the greatest potential for a boost to chlor-alkali and vinyls (CAV), where pre-hurricane market conditions have been supportive of ongoing price increases in caustic soda and nascent momentum in chlorine. As demand for chlorine tends to ebb seasonally at this time of year, supply of co-product caustic soda can be restricted, even in “normal” market conditions. Now, Hurricane Harvey has forced the temporary shutdown of at least two sites – OXY at Ingleside, Texas and...
• Specialty chemical effects tend to be neutral or marginally negative. Nearly one-third of US crude oil refining capacity lies in the “cone” of Harvey’s potential path. In this context, we expect...
• Our preferred way to play is Westlake. Among stocks in our coverage, our preliminary view is that Buy-rated Westlake Chemical (WLK) could benefit most given competitors’ outages in nearly all of Westlake’s major product lines: ethylene, polyethylene (PE) resin, chlor-alkali and PVC resin. We note that Westlake’s own assets are located in Lake Charles and points east in Louisiana as well as Kentucky and Europe. While Lake Charles could be affected in certain scenarios, our current read is that assets there are likely to continue to run.
• Overall, we remain Market Weight on US Chemicals exposure, albeit with a healthy appetite for risk. Within the chemicals sector we continue to prefer value vs. growth, preferably with a catalyst. Notwithstanding the strong performance of most commodity-linked chemical stocks YTD, our bottom-up work on cash flow and valuation leads us to believe that exposure here remains attractive, whether through pure-play or diversified chemical names. Our Buys of this ilk are DOW, EMN, HUN and WLK having shifted CE down a notch to Hold in July. Among growth-oriented specialty chemical producers, the pickings are slimmer in our opinion, although we did launch on WR Grace in May 2017 with a Buy and have since become (even) more constructive. Elsewhere among specialties we’ve shifted to a less bearish, although still not constructive posture on industrial gases having upgraded Air Products to Hold from Sell in early August. For the first time in nearly six years, we consider coatings and gases to be on equal footing in terms of risk-reward, as the former group struggles to defend margins.
(Please see full report for details)
Hurricane Trade Winds
• Category-2 Hurricane Harvey bears down on US Gulf Coast. Given the concentration of commodity chemical assets on the US Gulf Coast, we have written many hurricane-related research notes in our career. Fortunately, we have not been compelled to do so since 2008, when Hurricane Ike hit Texas as a high category-2 storm. Our first thoughts are always about the safety of people in the path of the storm. That said, with Harvey having strengthened rapidly yesterday, we take this opportunity to consider what this potentially devastating event could mean for chemical stocks in the days to come. Recognizing many uncertainties ahead of landfall this evening, we offer in Table 1 our preliminary assessment of risk and opportunity, purely from a stock perspective. The potential for impact remains fluid at this stage, so we will need to continue to assess market developments in coming days.
• It’s not the wind, it’s the humidity. By way of background, petrochemical plants are engineered to withstand hurricane force winds, so direct wind damage to plants is more the exception than the rule. In our experience, the primary risk tends to be...
• Supply restriction often leads to upward tension in commodity prices. At this writing we see the greatest potential for a boost to chlor-alkali and vinyls (CAV), where pre-hurricane market conditions have been supportive of ongoing price increases in caustic soda and nascent momentum in chlorine. As demand for chlorine tends to ebb seasonally at this time of year, supply of co-product caustic soda can be restricted, even in “normal” market conditions. Now, Hurricane Harvey has forced the temporary shutdown of at least two sites – OXY at Ingleside, Texas and...
• Specialty chemical effects tend to be neutral or marginally negative. Nearly one-third of US crude oil refining capacity lies in the “cone” of Harvey’s potential path. In this context, we expect...
• Our preferred way to play is Westlake. Among stocks in our coverage, our preliminary view is that Buy-rated Westlake Chemical (WLK) could benefit most given competitors’ outages in nearly all of Westlake’s major product lines: ethylene, polyethylene (PE) resin, chlor-alkali and PVC resin. We note that Westlake’s own assets are located in Lake Charles and points east in Louisiana as well as Kentucky and Europe. While Lake Charles could be affected in certain scenarios, our current read is that assets there are likely to continue to run.
• Overall, we remain Market Weight on US Chemicals exposure, albeit with a healthy appetite for risk. Within the chemicals sector we continue to prefer value vs. growth, preferably with a catalyst. Notwithstanding the strong performance of most commodity-linked chemical stocks YTD, our bottom-up work on cash flow and valuation leads us to believe that exposure here remains attractive, whether through pure-play or diversified chemical names. Our Buys of this ilk are DOW, EMN, HUN and WLK having shifted CE down a notch to Hold in July. Among growth-oriented specialty chemical producers, the pickings are slimmer in our opinion, although we did launch on WR Grace in May 2017 with a Buy and have since become (even) more constructive. Elsewhere among specialties we’ve shifted to a less bearish, although still not constructive posture on industrial gases having upgraded Air Products to Hold from Sell in early August. For the first time in nearly six years, we consider coatings and gases to be on equal footing in terms of risk-reward, as the former group struggles to defend margins.
(Please see full report for details)
