On Tuesday, BofA Securities adjusted its outlook on Westlake Chemical (NYSE:WLK) Partners LP (NYSE:WLKP), reducing the price target to $21 from the previous $22, while maintaining an Underperform rating on the stock. The firm expresses continued caution regarding Westlake's prospects, citing a lack of clear avenues for restarting distribution growth.
The analyst points to the financial position of Westlake Chemical Partners' parent company, Westlake, as a primary factor in their assessment. Despite projecting a decrease in Westlake's EBITDA from $2.6 billion to $2.4 billion for the year 2024, the company's net debt to EBITDA ratio remains low at 0.4x, and it boasts a strong liquidity position with $3.1 billion in cash.
Expectations are set for Westlake to generate positive free cash flow in 2024, 2025, and 2026, which further diminishes the likelihood of utilizing Westlake Chemical Partners' equity capital, even if the costs could be lower through the master limited partnership (MLP) than at the parent level.
The report also discusses the potential for increasing Westlake Chemical Partners' distributions through a raise in the fixed 10 cents per pound ethylene margin charged to Westlake for 95% of produced volumes.
However, the analyst deems this scenario unlikely in the near to intermediate term. They note that merchant ethylene margins have historically averaged well above 10 cents per pound, which could have allowed Westlake Chemical Partners to narrow the margin gap, yet this alignment has not occurred.
The firm's stance remains that without the need for additional funds from the parent company and with no expectation for an increase in the ethylene margin, there is no apparent reason for Westlake to tap into Westlake Chemical Partners' equity capital. Consequently, the outlook for distribution growth for Westlake Chemical Partners remains unpromising, reinforcing the Underperform rating.
InvestingPro Insights
Westlake Chemical Partners LP (NYSE:WLKP) is currently in the spotlight following BofA Securities' revised outlook. To provide a broader perspective, we turn to real-time data from InvestingPro. The company's Market Cap stands at $788.41M, with a P/E Ratio of 14.51, reflecting its earnings relative to share price. Notably, the P/E Ratio has slightly adjusted to 14.6 for the last twelve months as of Q1 2024. Despite a revenue decline of 24.09% over the last twelve months, Westlake Chemical Partners maintains a robust Gross Profit Margin of 32.85%, signaling efficient cost management.
InvestingPro Tips highlight the company's solid financial footing, with a high shareholder yield and a significant dividend yield of 8.43%, as of the latest data. This is coupled with a stock that generally trades with low price volatility, an attractive trait for investors seeking stability. Additionally, the company's cash flows can sufficiently cover interest payments, and its liquid assets exceed short term obligations, indicating a healthy liquidity position. These attributes are noteworthy for investors considering the current financial landscape of Westlake Chemical Partners.
For those interested in a deeper dive into Westlake Chemical Partners' financial health and future prospects, InvestingPro offers additional insights. There are currently 7 more InvestingPro Tips available, which can be accessed at: https://www.investing.com/pro/WLKP. To further enrich your investment strategy, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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