Now Is The Time To Jump In These Chemicals

Includes: DD, DOW, LYB
by: Fusion Research

The global chemical industry is expected to reach $5 trillion in 2015 from $3.5 trillion in 2011. This industry is cyclical in nature and global economic conditions affect it greatly. As a result, the Europe debt crisis and weakness in the U.S. economy resulted in a depressed demand for chemical output in 2012. Going forward, this industry will benefit from improving macroeconomic scenario and rising shale gas production in the U.S. Three chemical companies are focusing on growing markets, like agriculture products, and facility expansion to capitalize on this opportunity.

Capitalizing on low cost natural gas

LyondellBasell Industries NV (NYSE:LYB) is expanding its methanol production at its Channelview Plant in Texas to take advantage of low cost natural gas supplies in the U.S. Natural gas is the main feedstock for methanol production, and with the decrease in prices, the company plans to restart its idle methanol plant which has a capacity to produce260 million gallon of methanol every year. It closed this unit nearly a decade ago because of the high cost of natural gas. LyondellBasell has already received environmental permits and construction has commenced for which it will invest around $150 million this year. Construction is expected to complete by the fourth quarter of 2013, and it is expected to contribute around $250 million EBITDA per year upon completion.

The company's Olefins and Polyolefins Americas segment reported EBITDA of $951 million in the second quarter ended in June 2013 with 6% quarter- over- quarter growth. The segment includes ethylene, its co-product polyethylene, and polypropylene. The strong result was due to full capacity utilization of its ethylene plant and better margins in polyethylene and polypropylene due to inexpensive natural gas feedstock.

Ethane prices have also reduced, resulting in its increased use for the production of ethylene. In the second quarter, the company's ethylene plants operated above 100% of capacity. The company earnings will continue to benefit by weak ethane prices. It is expected that the prices will remain low due to bulk supply and current limited use of ethane, as the new ethylene plant in the U.S will be operational by 2017. Due to these advantages, its EBITDA is expected to reach $3.5 billion this year compared to $2.9 billion last year.

A shift in focus for better returns

E. I. du Pont de Nemours and Company's (DD) agriculture segment reported revenue of $3.6 billion in the second quarter ended June 2013. The revenue growth of 7% year-over-year is due to higher seed prices and increased demand for crop protection products.

Increasing demand of Aquamax corn seeds is driving up seed prices. Aquamax corn seeds are drought tolerant, provide more yield in a limited water environment, and are preferred among farmers. Also, the farmers are expected to plant Aquamax on 7 million acres in North America this year compared to 2 million acres in 2012, and the company is on track to achieve 5-10% price growth with Aquamax this year.

Rynaxypyr led the growth in crop protection. It is insecticide used for chewing pest control. It has a significant impact on E. I. du Pont's agriculture segment sales. Analysts expect the sales of Rynaxypyr to reach $900 million this year compared to $750 million in 2012. With growth in Aquamax and Rynaxypyr, revenue is expected to reach $11.65 billion this year compared to $10.42 billion last year.

The company recently announced plans to divest its performance chemical segment. This segment contributes around 18.5% in total revenue and includes Titanium dioxide, or TiO2, and Teflon Fluoro products. The divestiture plan is part of the company's move to focus on higher growth, less volatile and cyclical business like agriculture, which is its major revenue contributor.

The chemical segment has volatility in the earnings, and is facing headwind due to continuous decline in prices of TiO2. E. I. du Pont is exploring strategic alternatives for this divestiture to derive maximum value, including a complete sale, partial sale, or spin-off. The analyst estimates that this segment could be sold for approximately $8.3 billion. The chemical segment has estimated enterprise value of approximately $10.1 billion and generated $7.2 billion in revenue last year.

Agriculture science segment growing potential

The Dow Chemical Company's (DOW) agriculture science segment reported revenue of $1.9 billion with 10% year-over-year growth in the second quarter ended in June 2013. Rising demand for its seed products and crop protection sales propelled the revenue growth. The seed, traits, and oil products sales grew 4% year-over-year, driven by strong farmer demand for SmartStax corn hybrids. These hybrid seeds enable farmers to yield a greater number of bushels per acre compared to other hybrids. Increased sales of herbicides and insecticides in all geographical regions, led by Latin America, drove crop protection sales. The segment will continue to witness growth as farmers feel the pressure to produce more and less land.

Dow Chemical planned to enter into a joint venture with Petrochemical Industries Company, or PIC, in 2008 for $17.4 billion. PIC later pulled out of the deal in December 2008. Dow sued PIC and received $2.2 billion cash as arbitration payment for pulling the joint venture deal in May 2013. The company used this cash for payment of higher cost debt of around $1.6 billion. As a result, the company's net debt to capitalization declined to 36.4% in the second quarter compared to 40.4% in 2012. The company plans to further reduce its total debt by $2 billion this year. The full implementation of debt reduction plan will bring interest savings of more than $150 million this year, with $30 million interest saving realized in the second quarter.


All three chemical companies have strong growth prospects with a focus towards agriculture products and expansion plans to take advantage of low cost natural gas.

LyondellBasell Industries' growth in its Olefins and Polyolefins segment will continue with weak ethane prices, and the expansion of its methanol plant will drive EBITDA.

E. I. du Pont's plan for performance chemical divestiture and focus towards growing its agriculture business provides better future prospects.

Dow Chemical has strong growth potential in its agriculture science segment, which will enhance revenue, and its debt reduction plan will result in interest savings.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.