Westlake Chemical Partners Stock: Reliable 8.6%-Yielder Declares 35th Consecutive Distribution
June 22, 2023
Why WLKP Stock Has 33% Upside
Westlake Chemical Partners LP (NYSE:WLKP) is a great company that you don’t really hear income investors discuss around the water cooler. But they should. The company continues to report solid financial results, and industry tailwinds are positioning it to keep delivering outstanding earnings and cash flow.
As of this writing, Westlake Chemical Partners LP has declared 35 consecutive quarterly dividends. Moreover, the company’s unit price has excellent near-term and long-term growth potential.
Westlake Chemical Partners is a limited partnership formed by Westlake Chemical Corp (NYSE:WLK) to operate, acquire, and develop ethylene production facilities. (Source: “About Us,” Westlake Chemical Partners LP, last accessed June 14, 2023.)
The company’s business and operations are conducted through Westlake Chemical OpCo LP, which is a partnership between Westlake Chemical Partners and Westlake Chemical Corp. Westlake Chemical Partners owns a 22.8% interest in Westlake Chemical OpCo LP. (Source: “Westlake Chemical Partners LP Announces First Quarter 2023 Results,” Westlake Chemical Partners LP, May 4, 2023.)
Westlake Chemical Partners’ assets include three ethylene production facilities in Calvert City, Kentucky and Lake Charles, Louisiana. Here, the company converts ethane into ethylene (with an annual capacity of approximately 3.4 billion pounds) and ships it along its 200-mile ethylene pipeline.
Ethylene is often called the world’s most important chemical. It’s 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 gets weaved into polyesters and becomes antifreeze for airplane engines and wings
- Ethylene dichloride transforms into vinyl that’s used in pipes, siding, medical devices, and clothing
- Styrene is a synthetic rubber found 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 OpCo’s ethylene production is sold to Westlake for a stable margin of $0.10 per pound (net of operating costs, maintenance capital expenditures, and reserves for future expenditures). (Source: Ibid.)
Q1 Cash Flow From Operations Up 38% Year-Over-Year
For the first quarter of 2023, ended March 31, Westlake Chemical Partners LP announced that its net income slipped by eight percent year-over-year to $14.8 million, or $0.42 per share. Its cash flow from operating activities advanced 38% year-over-year to $144.9 million. (Source: Ibid.)
For the three months ended March 31, the company’s master limited partnership (MLP) distributable cash flow was $17.6 million, a decrease from $20.3 million in the first quarter of 2022. The decrease in MLP distributable cash flow was primarily attributable to higher interest expenses and higher maintenance capital spending at Westlake Chemical OpCo LP.
Commenting on the results, Albert Chao, Westlake Chemical Partners LP’s president and CEO, said, “The Partnership’s performance in the first quarter of 2023 reflects strong production volumes and a modest improvement in third-party ethylene margins from the fourth quarter of 2022.” (Source: Ibid.)
He continued, “We remain well positioned to deliver solid earnings and cash flows as we continue to benefit from robust production levels paired with our sales agreement with Westlake that delivers a fixed margin on 95% of our production.”
Regarding the rest of 2023, Chao said Westlake Chemical Partners LP has already sold or contracted the majority of its third-party volume at prices that are favorable, compared to the second half of 2022.
This, he said, highlights the “strong underlying fundamentals” of the partnership and its predictable cash flow to Westlake Chemical Partners’ unitholders.
Westlake Chemical Partners LP Announces 35th Consecutive Dividend
Westlake Chemical Partners’ predictable cash flow helps juice its reliable, high-yield dividends.
In May, the partnership declared a distribution of $0.4714 per unit, for a current yield of 8.6%. That’s more than twice the current U.S. inflation rate of four percent. (Source: “Westlake Chemical Partners LP Announces First Quarter 2023 Distribution,” Westlake Chemical Partners LP, May 2, 2023.)
As you can see in the red line in the chart below, Westlake Chemical Partners had a history of raising its dividends every quarter since going public in late 2014. Before the COVID-19 pandemic, the company hiked its payouts to WLKP unitholders for 21 straight quarters.
In the fourth quarter of 2014, Westlake Chemical Partners stock 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: “Dividend History,” Westlake Chemical Partners LP, last accessed June 16, 2023.)
But then COVID-19 hit. The fallout for the company wasn’t all that bad, really. Westlake Chemical Partners still paid a dividend; management just didn’t raise it. They have held WLKP stock’s dividend at $0.4714 since then.
One reason Westlake Chemical Partners LP has been able to maintain its frothy payout is its stable and predictable cash flow from having 95% of its production at a fixed margin. This insulates the partnership from the commodity price risk to its investment-grade parent company. This provides flexibility in uncertain economic environments.
Once the economic outlook becomes more certain, chances are good the company will resume hiking its quarterly distributions.
This should also be good for the price of Westlake Chemical Partners units.
As of this writing, Westlake Chemical Partners stock is up by roughly 12% over its record pre-pandemic level, and it has surged by 181% since hitting an all-time low of $7.73 in March 2000. More recently, WLKP units have gone up by three percent over the last three months but have gone down by 3.5% year-to-date and 8.5% year-over-year.
Despite being in the red, the outlook for WLKP stock is solid, with Wall Street analysts providing a 12-month unit price target of between $26.00 and $29.00. This points to potential gains from Westlake Chemical Partners LP in the range of 19.5% to 33%.
Chart courtesy of StockCharts.com
The Lowdown on Westlake Chemical Partners Stock
Westlake Chemical Partners LP is a leader in a lucrative niche industry.
Thanks to the long-term strength of its market position and a predictable sales agreement, the partnership is able to report stable, fee-based cash flow. And it uses that cash to provide Westlake Chemical Partners unitholders with reliable, ultra-high-yield dividends—35 consecutive quarters and counting.
