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Opus News & Insights

Westlake Chemical Partners - Equity Issuance Dip and Asset Drop-Down Create 65% Total Return Upside
Thursday, September 28, 2017

  • 7% forward yield and strong prospects for stable +10% distribution growth are tough to beat
  • Asset drop down should be highly accretive to distributable cash flow per unit
  • Increased trading liquidity will bring this MLP out of the backwater – institutional demand for the shares will trigger an upwards revaluation in the unit price
  • I see 65% total-return upside 
This is just a quick note on the equity issuance and asset drop-down announced by Westlake Chemical Partners yesterday after the close – an event I have been waiting on for several months. My first article on the security can be found here.

The $229.2 million drop down purchase will be funded with 5,175,000 new units (assuming underwriters utilize their option to purchase full allotment) and the company’s existing credit facility. This combination of equity issuance and use of the credit facility (currently 3.15% interest rate) suggests that the drop down will be highly accretive to distributable cash flow per unit.

Indeed, Management is targeting greater than 10% distribution growth for at least 10 years, which looks conservative given the huge drop-down inventory. After this transaction is complete, Westlake Partners will still only own 18.6% of the OpCo. In addition, the Westlake Chemical’s (WLK) acquisition of Axiall (closed September 2016) left the company short Ethylene capacity. If Westlake Chemical decides to build additional capacity to bring Ethylene production back in balance (which I view as likely given Westlake Chemical’s strategy of controlling the full value chain of chemical production) it will create an additional source of growth for Westlake Partners.

With a current forward yield (my estimate) of 7% and strong prospects for greater than 10% distribution growth over the next 10 years, I believe it is almost impossible to find a better combination of consistent distribution growth and high current yield.

My research indicates that many institutional investors have stayed on the sidelines with Westlake Partners, due to the extremely low average trading volume and concentrated ownership. As such, the increased number of units outstanding should increase aid in the positive revaluation.

My one year forward price target is $35, at which point Westlake Partners will be trading at a more reasonable 4.5% trailing distribution yield – which I see as very reasonable given growth prospects and strong sponsor support. I have used today’s dip in price to add to the Active Opportunity Strategy’s position – I see 65% total return potential over the next 12 months.

Westlake Chemical Partners Key Investment DriversMr. Stewart is Portfolio Manager of the Opus Active Opportunity Strategy. The Active Opportunity strategy is a "go anywhere" concentrated value strategy that focuses on under-followed and misunderstood securities. The objective of the strategy is to maximize investor returns while minimizing the risk of permanent capital impairment. Accredited Investors are invited to contact Opus Capital Management in order to learn more. Opus Capital Management reserves the right to make investment decisions regarding any security without further notification except where such notification is required by law.



 
 

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