Westlake Chemical Partners: Still Superior To Other High-Yielding MLPs (NYSE:WLKP)


Introduction

It was approximately three months ago that I published an article covering my investment thesis for the largely underfollowed ethylene producer, Westlake Chemical Partners (WLKP). They stand out favorably in a wide field of high-yielding Master Limited Partnerships that are hereon referred to as MLPs. Although their unit price has increased during the last three months, they still offer a desirable high distribution yield of around 9%. This article reassesses the original investment thesis against their new financial results to ensure that they are still tracking in the right direction, whilst also providing an overview of the original investment thesis for any new readers.

Executive Summary & Ratings

Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.

Image Source: Author.

Detailed Analysis

Westlake Chemical Partners cash flows

Westlake Chemical Partners notes 1

Image Source: Author.

Instead of simply assessing distribution coverage through distributable cash flow, I prefer to utilize free cash flow since it provides the toughest criteria and best captures the true impact to their financial position. The main difference between the two is that the former ignores the capital expenditure that relates to growth projects, which given the very high capital intensity of their industry can create a material difference.

The first and most important aspect that separated them from the sea of other MLPs was their ability to consistently cover their distributions with free cash flow. During 2017-2019 their distribution coverage averaged a solid 181.72%, which provides a margin of safety and also indicates that unlike many MLPs, they are not reliant on debt to fund any of their distribution payments.

The first half of 2020 saw some of the toughest economic conditions the world has faced in at least a decade and in certain aspects, generations. This naturally stress-tested all MLPs and thus helped investors separate the weak from the strong. Looking at their performance during this period of time, it can be seen that their operating cash flow actually increased 4.70% year on year or 6.42% once removing the impacts of working capital movements and thus helps support the original investment thesis.

This strong performance helped keep their distribution coverage at a strong 138.26% during the first half of 2020, which allowed them to defy the trend of their peers and keep their distributions unchanged. Their relative strength was not lost on management which quite interestingly highlighted how many of their peers reduced their distributions, as the graph included below displays.

MLP Distribution Reductions

Image Source: Westlake Chemical Partners’ August 2020 Investor Presentation

When looking further into the future, they have four core pillars to help ensure that they can continue sustaining and likely growing these distributions for unitholders, as the slide included below displays. The combination of a favorable IDR reset in 2018 and further dropdowns from their parent company, Westlake Chemical Corporation (WLK) should ensure that 2020 does not mark the end of their growth phase.

Westlake Chemical Partners strategy

Image Source: Westlake Chemical Partners’ August 2020 Investor Presentation (previously linked).

Given their highly desirable combination of low capital expenditure and stable operating cash flow, it should ensure that their high distribution yield is at least sustained at their current level even if their growth prospects fail to materialize. Even though this is already quite a favorable situation, it nonetheless is still very important to assess their capital structure, leverage and liquidity.

Westlake Chemical Partners capital structure

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The first aspect of their capital structure that is quickly apparent is the extent that their equity towers above their debt. The second important aspect that separated them from other MLPs was their very low leverage, which is extremely rare. Since their capital structure has not materially changed along with their stable cash flow performance, it would indicate that they still retain this very favorable characteristic.

Westlake Chemical Partners leverage ratios

Westlake Chemical Partners notes 2

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Thankfully their very low leverage has continued well through the second quarter of 2020, as primarily evidenced by their net debt-to-EBITDA of 0.83 sitting comfortably below 1.00. Their other financial metrics further support this assertion, with interest coverage of 31.58 further indicating that they could easily triple their net debt without it straining their financial health. This supports their ability to not only sustain their distributions, but also invest to grow them larger. This is quite possibly one of the most unique aspects of the original investment thesis, as normally a high distribution yield goes hand in hand with high leverage and thereby reflecting the heightened risks.

Westlake Chemical Partners liquidity ratios

Image Source: Author.

It was also positive to see that they also sport strong liquidity, as primarily evidenced by their current and cash ratios of 7.91 and 0.76 respectively. Thankfully this did not deteriorate even slightly since publishing the original investment thesis and thus helps them sustain their distributions. Given their ability to consistently generate free cash flow after distribution payments that is accompanied by a relatively large cash balance, they have a desirable situation of not relying on credit facilities to support their liquidity. Since the entirety of their debt is held by their parent company, there are no reasons to be concerned about any upcoming debt maturities.

Conclusion

Even though the second quarter of 2020 was a tough one that saw millions of people placed into lockdown and economic activity plunge in many major countries, their earnings remained resilient and thus they were able to sustain their distributions. When this is combined with their high distribution yield, I believe that maintaining my bullish rating is appropriate.

Notes: Unless specified otherwise, all figures in this article were taken from Westlake Chemical Partners’ Q2 2020 10-Q, 2019 10-K and 2017 10-K SEC Filings, all calculated figures were performed by the author.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WLKP over 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.

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