Westlake Chemical Partners Stock: High-Yielder Has 20% Upside
November 24, 2023
37th Straight Quarterly Dividend From WLKP Stock
Westlake Chemical Partners LP (NYSE:WLKP) is a great stock that seems to fly under the radar of Wall Street. Or at least it doesn’t get discussed as much as other high-yield dividend stocks.
Which is odd, really. The company has been reporting solid financial results, including quarter-over-quarter growth in its income, adjusted earnings, and cash flow. It also recently declared its 37th consecutive quarterly dividend.
Westlake Chemical Partners stock’s price hasn’t gone up much in 2023, but conservative Wall Street analysts see sunnier days ahead.
Westlake Chemical Partners was founded by Westlake Chemical Corp (NYSE:WLK) to acquire, develop, and operate ethylene production facilities and other assets. (Source: “About Us,” Westlake Chemical Partners LP, last accessed November 20, 2023.)
Westlake Chemical Partners’ business and operations are conducted through Westlake Chemical OpCo LP, which is a partnership between Westlake Chemical Corp and Westlake Chemical Partners.
Westlake Chemical Partners has a 22.8% stake in Westlake Chemical OpCo, which owns three ethylene production facilities in Kentucky and Louisiana. There, Westlake Chemical OpCo converts ethane into ethylene, which it ships through a pipeline, which it also owns. (Source: “Westlake Chemical Partners LP Announces Third Quarter 2023 Results,” Westlake Chemical Partners LP, November 3, 2023.)
The production facilities have an annual capacity of about 3.7 billion pounds, and the pipeline is 200 miles long. (Source: “About Us,” Westlake Chemical Partners LP, op. cit.)
Ethylene is often called the world’s most important chemical. It’s also a leading indicator of growth in the manufacturing sector.
Why?
Ethylene is a building block of plastic and other compounds, which are then turned into numerous household and industrial products.
Polyethylene is used to make food packaging, bottles, bags, and other plastic goods. Ethylene oxide/ethylene glycol is weaved into polyesters to become antifreeze for airplane engines and wings. Ethylene dichloride is transformed into vinyl that’s used in pipes, siding, medical devices, and clothing. Styrene is a synthetic rubber that’s used in tires and foam insulation.
Because of this, Westlake Chemical Partners LP’s products are always in demand.
Furthermore, Westlake Chemical OpCo LP’s sales agreement with Westlake Chemical Corp is such that 95% of Westlake Chemical OpCo’s ethylene production is sold to Westlake Chemical Corp for a stable margin of $0.10 per pound (net of operating costs, maintenance capital expenditures, and reserves for future expenditures). (Source: Westlake Chemical Partners LP, November 3, 2023, op. cit.)
Income, EBITDA, & Cash Flow Grew Quarter-Over-Quarter
For the third quarter (ended September 30), Westlake Chemical Partners announced that its net income slipped by 10% year-over-year to $13.2 million, or $0.37 per unit. The reduction was the result of higher interest rates on the company’s floating-rate debt. (Source: Westlake Chemical Partners LP, November 3, 2023, op. cit.)
On a quarter-over-quarter basis, the partnership’s third-quarter net income went up by 11%. That growth was due to increased sales volume as a result of the completion of the Calvert City, Kentucky turnaround in the second quarter of 2023.
Westlake Chemical Partners LP’s cash flow from operating activities went down in the third quarter by 12.5% year-over-year to $100.9 million but up by 2.4% quarter-over-quarter from $98.5 million.
The company’s master limited partnership (MLP) distributable cash flow was $13.6 million in the third quarter, down from $16.7 million in the same period last year and down from $15.0 million in the second quarter of 2023. The decrease was primarily due to higher maintenance capital expenditures, which are weighted toward the second half of the year.
Commenting on the results, Albert Chao, Westlake Chemical Partners’ president and CEO, said, “We were pleased with the Partnership’s performance in the third quarter of 2023, with net income, EBITDA and cash flow from operations all increasing from the second quarter.” (Source: Westlake Chemical Partners LP, November 3, 2023, op. cit.)
“While distributable cash flow was sequentially lower due to the timing of maintenance capital spending, our underlying financial results and cash flows remain stable and predictable, supported by our sales agreement with Westlake that delivers a fixed margin on 95% of our production.”
Westlake Chemical Partners LP Announced 37th Consecutive Dividend
In late October, Westlake Chemical Partners announced a third-quarter distribution of $0.4714 per unit, for a yield of 8.83% (as of this writing). That’s almost triple the current inflation rate of 3.2%.
As you can see in the chart below, the company had a history of raising its distribution every quarter since going public in late 2014. In fact, prior to the COVID-19 pandemic, management hiked WLKP stock’s payout for 21 straight quarters.
In the fourth quarter of 2014, the partnership paid out $0.1704 per unit. By the first quarter of 2020, the quarterly distribution had soared by 176% to $0.4714 per unit. (Source: “Dividends,” Westlake Chemical Partners LP, last accessed November 20, 2023.)
But then the pandemic hit. The fallout wasn’t all that bad, really. Westlake Chemical Partners still paid dividends; it just didn’t raise the amount. Management has held Westlake Chemical Partners stock’s dividend at $0.4714 per share since then.
Chart courtesy of StockCharts.com
One reason Westlake Chemical Partners has been able to maintain its juicy payout is its stable and predictable cash flow, which comes from the 95% of its production that’s at a fixed margin. This insulates the partnership from commodity-price risk to its investment-grade parent company, which provides flexibility in uncertain economic environments.
Once the economic outlook becomes more certain, chances are good that Westlake Chemical Partners will resume hiking its quarterly distributions.
That could juice the price of Westlake Chemical Partners units.
For the most part, WLKP units have traded rangebound since April 2021. As of this writing, Westlake Chemical Partners units are up by:
- 7.0% over the last six months
- 0.5% year-to-date
- 3.5% year-over-year
Not exactly earth-shattering, but investors have been able to weather the lackluster share-price growth by receiving WLKP stock’s reliable, high-yield dividends.
Moreover, the outlook for Westlake Chemical Partners stock’s price is robust. Wall Street analysts have provided a 12-month median forecast of $23.00 per share and a high forecast of $26.00 per share. This points to possible gains from WLKP stock in the range of 6.5% to 20.5%.
The Lowdown on Westlake Chemical Partners Stock
My positive opinion of Westlake Chemical Partners LP hasn’t changed since I wrote about the company in June.
Thanks to the long-term strength of the partnership’s market position and the protective provisions of its sales agreement, Westlake Chemical Partners is able to generate stable, fee-based cash flow. And it uses that cash to provide WLKP stockholders with reliable, high-yield dividends (37 consecutive quarters and counting).
