Earnings Call Transcript - WLKP Q1 2021

Operator, Operator

Good afternoon. Thank you for standing by. Welcome to the Westlake Chemical Partners First Quarter 2021 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After the speakers, you will be invited to participate in a question-and-answer session. As a reminder, this conference call is being recorded today, May 4, 2021. I would now like to turn the call over to today's host, Jeff Holy, Westlake Chemical Partners' Vice President and Treasurer. Sir, you may begin.

Jeff Holy, Vice President and Treasurer

Thank you, Valerie. Good afternoon, everyone and welcome to the Westlake Chemical Partners first quarter 2021 conference call. I'm joined today by Albert Chao, our President and CEO; Steve Bender, our Senior Vice President and CFO; and other members of our management team.

Albert Chao, President and CEO

Thank you, Jeff. Good afternoon, everyone. And thank you for joining us to discuss our first quarter results. In this morning's press release, we reported consolidated net income including OpCo's earnings of $77 million for the first quarter of 2021. Westlake Partners first quarter 2021 net income was $15 million or $0.43 per unit.

Steve Bender, Senior Vice President and CFO

Thank you, Albert, and good afternoon everyone. In this morning's press release, we reported consolidated net income including OpCo's earnings of $77 million on consolidated sales of $268 million for the first quarter of 2021. Westlake Partners' first quarter net income was $15 million or $0.43 per unit. The partnership had distributable cash flow for the quarter of $16 million or $0.46 per unit. As Albert mentioned, provisions in the ethylene sales agreement commit Westlake to purchase and pay for a defined amount of ethylene from OpCo each calendar year, thus largely insulating us from the impact of these outages during force majeure events. Through the protective provisions of this agreement, OpCo continues to receive a $0.10 margin per pound for ethylene volumes that would have been produced plus production costs that were incurred, allowing OpCo and interim Westlake Partners to deliver consistent earnings during these unplanned events. As a result of the ethylene sales agreement, net income in the first quarter of 2021 included a benefit of $10 million. This revenue and cost recovery mechanism is an example of how our business model provides predictable earnings and cash flows, thus delivering value to our unit-holders over the long term.

Albert Chao, President and CEO

Thank you, Steve. We are pleased with the Partnership's financial performance. The stability of our business model was well illustrated in 2021, as our ethylene sales agreement and its protective provisions provided us with the predictable earnings and cash flows, despite the winter storm and associated unplanned production outages. We remain optimistic about sustained demand for ethylene, driven by continuing downstream demand for polyethylene and PVC produced by our parent, Westlake Chemical, and continuing strong demand for ethylene to support our third-party sales. Our ethylene sales agreement provides a predictable fee-based cash flow structure from our take-or-pay contract with Westlake for 95% of OpCo's production, and we will continue to deliver stable and predictable cash flows. We maintain a strong balance sheet with conservative financial and leverage metrics. As we continue to navigate market conditions, we'll evaluate opportunities via four levers of growth, including increases of our ownership interest in OpCo; acquisitions of other qualified income streams; organic growth opportunities such as expansions of our current ethylene facilities; and negotiations for a higher fixed margin in our ethylene sales agreement with Westlake. We remain focused on our ability to continue to provide long-term value to our unitholders. As always, we will continue to operate safely along with being good stewards of the environment in the communities in which we work and live. Thank you very much for listening to our first quarter earnings call. Now, I'll turn the call back over to Jeff.

Jeff Holy, Vice President and Treasurer

Thank you, Albert. Before we begin taking questions, I would like to remind you that a replay of this teleconference will be available two hours after the call has ended. We'll provide that number again at the end of the call. Valerie, we will now take questions.

Operator, Operator

Thank you. Our first question comes from Mike Leithead of Barclays. Your line is open.

Mike Leithead, Analyst

Great. Thanks. Good afternoon, guys.

Albert Chao, President and CEO

Good afternoon.

Mike Leithead, Analyst

I guess first question, if you look at the current unit price now over $27, obviously much improved since you changed the distribution strategy in late 2019. I think on an absolute price level, the last time you were sustainable here was, call it, 2015 or so. Although I guess the yield will maybe be a bit better at that time. I guess my question is how, if at all, is your thinking on distribution growth evolving? Are you thinking about restarting that growth again, or maybe what's a few of the gating items that would need to be cleared up before restarting distribution growth? Just any perspective there would be much appreciated.

Steve Bender, Senior Vice President and CFO

Certainly. So Mike, we paused distribution growth actually in early 2020. The market really is indicating a preference toward a value model versus a growth model. But certainly, we'll continue to evaluate that investor interest and preference in the future and look to see what the investor is looking for. As Albert outlined, we've got those four growth levers available to us. Should we see a switch back to a growth valuation model from the valuation model, we certainly have those levers available to us to do so.

Mike Leithead, Analyst

Great. That's helpful. And then just a quick follow-up. For the Petro two turnaround this year, can you just briefly remind us how that should flow through Westlake Partners as P&L?

Steve Bender, Senior Vice President and CFO

And so certainly over the course of the period, we planned for this and the stated production. We establish a production plan for the year. There will be some loss of pounds relative to say a normalized year. But we'll still get that $0.10 fixed margin and full cost recovery on the pounds that are produced over the course of 2021.

Mike Leithead, Analyst

Great. Thank you.

Steve Bender, Senior Vice President and CFO

You're welcome.

Operator, Operator

Thank you. Our next question comes from Steve Byrne of Bank of America. Your line is open.

Steve Byrne, Analyst

Hi. I just want to say we had a divide in frankly this morning, so I was sorry I wasn't on your earlier call, but I have a couple for you. Maybe first up would be where your thinking is these days on whether the partnership valuation is maybe sufficiently attractive to raise funds and transfer some of the ownership of the joint venture with Lotte that cracker into OpCo?

Steve Bender, Senior Vice President and CFO

So Steve, as I mentioned just a moment ago, the market really is looking more at a value model than necessarily a growth-oriented model. Certainly, the acquisition by OpCo of the ownership that Westlake has in the LACC ethylene unit is one of those four levers that we've talked about in our acquisition strategy, if you will. Certainly, that could be one of the options to grow distributions over time if the market moves more toward rewarding growth versus rewarding value. As Mike just mentioned a moment ago, we've seen valuations that have taken the yield to in the neighborhood of about 7%. And certainly, as we think about the path going forward, we're certainly attentive to the investor interest in the value model or the growth model that they're interested in addressing. We are well positioned to address either one of those, given the tools and the levers that we have available to us.

Steve Byrne, Analyst

And the hydrogen off gas from the crackers, just curious, whether that is being used as fuel in the various furnaces and whether any of your ESG initiatives would lead you down the path of potentially using an electric source of heat for the furnaces or green hydrogen. Any of those as potential implications on the operations of these crackers?

Steve Bender, Senior Vice President and CFO

So Steve, from a Westlake Chemical perspective, certainly, we'll assess opportunities to take advantage of any of the byproducts that are available to improve the value proposition. If there's a higher valuation relative to the return of any investments that may be necessary to provide that higher, cleaner form of hydrogen, that certainly is an alternative. We're always interested in looking for ways to be more socially and environmentally friendly while simultaneously providing a good value or return to all of our investors.

Steve Byrne, Analyst

Okay. Thank you.

Steve Bender, Senior Vice President and CFO

You're welcome.

Operator, Operator

Thank you. At this time, the Q&A session has now ended. I will now turn the call back over to Jeff Holy.

Jeff Holy, Vice President and Treasurer

Thank you again for participating in today's call. We hope you'll join us for our next conference call to discuss our second quarter results.

Operator, Operator

Thank you for participating in today's Westlake Chemical Partners First Quarter Earnings Conference Call. As a reminder, this call will be available for replay, beginning two hours after the call has ended and may be accessed until 11:59 p.m. Eastern Standard Time on Tuesday, May 11, 2021. Replay can be accessed by calling the following numbers. Domestic callers should dial 855-859-2056. International callers may access the replay at 404-537-3406. The access code is 3327838. This concludes today's call. Goodbye.