PDH is one of six IPOs scheduled for the week of April 30th. (Full IPO calendar here).
Manager, Joint Managers: Morgan; Citigroup; UBS.
PDH Built an independent plant to process propane into propylene.
PDH began operations in October 2010 and, after a year-long start-up and plant optimization phase, achieved production rates at or near current capacity beginning in December 2011.
PDH expects to make a $2.20 cash distribution for the 12 months ending June 30, 2013, which is an 11% payout at the price range mid-point.
The payout is based on a forecasted 30% net profit margin, which is not sustainable in a commodity business, because customers and competitors are highly motivated to increase supply by building their own plants.
RISKY PLAY ON THE PROPANE-TO-PROPLYLENE SPREAD
The propane-to-proplylene spread is historically high now, compared to the averages for 2000-2007.
The spread in a downward trend
The spread is down 9% from a year ago to $.43 per pound from $.46 per pound. PHD expects a further decline to $.416 by June 2013, clearly a downward trend. IPOdesktop expects the downward trend to continue as the majors complete their in-house plant building plans.
Commodity Pricing Dynamics
Because propane is the sole feedstock, and propylene is the primary product sold by PDH's facility, PDH's profitability is primarily determined by the difference in price between propane and propylene, the "propane-to-propylene spread."
Like other commodities, the pricing for propylene and propane reflect supply and demand dynamics that are intricately related to the price movements of crude oil, natural gas and petrochemicals. The current dynamics affecting the price of these commodities, together with the tight supply/demand environment for propylene have led to the recent increase in the propane-to-propylene spread.
MAIN CUSTOMERS BUILDING NEW PLANTS
Dow Chemical recently announced its plan to build its own on-purpose propane dehydrogenation propylene facility for start-up in 2015.
Dow also announced that it is considering building a second propylene facility with a possible start-up date in 2018.
CURRENT CONTRACTS EXPIRE BETWEEN 2013 & 2018
During 2011, PDH's three largest customers accounted for approximately 95% of total sales.
PDH currently has multi-year contracts with The Dow Chemical Company (DOW), Total Petrochemicals USA (TOT), BASF Corporation (BASFY) and INEOS Olefins and Polymers USA (INEABS ) that expire between 2013 and 2018 and a one-year contract with LyondellBasell Industries N.V. (LYB) that ends in December 2012.
Each of PDH's customer contracts contain pricing terms based upon market rates - that's a double edged sword.
CONVOLUTED ORGANIZATIONAL STRUCTURE
IPOdesktop does not like convoluted organizational structures.
Based on the above, IPOdesktop believes the PDH IPO can turn into a risky investment.
PDH built an independent plant to process propane into propylene. Propylene is utilized in the production of a variety of end uses including paints, coatings, building materials, clothing, automotive parts, packaging and a range of other consumer and industrial products.
PRIVATE EQUITY SPONSOR
This is a bailout for the PE firms, because they are receiving 96% of the IPO proceeds, and it's likely they will continue to sell when they can in the after market.
PDH is majority owned by Lindsay Goldberg and York Capital. Although the project development for the facility occurred over several years beginning in 2003. PDH's predecessor was legally formed in 2007 to acquire the site of a former ethylene cracker from ExxonMobil and to develop the site into a PDH facility with the support of PDH's sponsors.
After the closing of this IPO, Lindsay Goldberg will indirectly own 67% of the general partner and directly and indirectly own 50% of the common units, York Capital will indirectly own 17% of the general partner and directly and indirectly own 13% of the common units.
Management estimates over 30 different companies produce propylene in North America.
PDH considers companies with net long positions in PGP and CGP to be direct competitors, including Enterprise (EPD), Chevron Phillips (CVX), ExxonMobil Chemical (XOM), Shell Chemical (RDS.B), Flint Hills and the Williams Companies (WMB).
Dow Chemical recently announced its plan to build its own on-purpose propane dehydrogenation propylene facility for start-up in 2015. Dow also announced that it is considering building a second propylene facility with a possible start-up date in 2018.
USE OF PROCEEDS
PDH expects to net $23.3 million from sale of 1.5 million units by PDH. Shareholders intend to sell 33.5 million units or 96% of the IPO.
The $23.3 million in IPO proceeds to the company are allocated for working capital and general partnership purposes including "funding a portion of the distributions to our common unitholders for the lost margin resulting therefrom" from a planned maintenance project in 2013. S-1 page 11
Disclaimer: This PDH IPO report is based on a reading and analysis of PDH's S-1 filing which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.