Loeb To Dow: You’re No LyondellBasell
May01

Loeb To Dow: You’re No LyondellBasell

In an investor letter, Daniel Loeb, who heads the hedge fund Third Point, a major Dow Chemical shareholder, gave his constructive critique of Dow’s strategy. Dow, he says, should be earning $2.5 billion more than it currently does. The letter was by no means scathing. He praised Dow’s share buyback program. He acknowledged that Dow has pledged more transparency, but he wants to see more. Specifically, he wants Dow to disclose its transfer pricing methodology between its petrochemical units and its downstream derivatives businesses. Without this, it is impossible to tell whether the Eeedstocks and Energy segment is subsidizing the Performance Plastics segment. In other words, where is the company really adding value? And overall, Loeb says, Dow isn’t adding enough value. And whom does he compare Dow to? LyondellBasell: “Dow has ~30% more North American ethylene capacity, triple the Middle Eastern ethylene capacity, and more North American derivatives capacity than Lyondell, yet the two companies generate the same amount of EBITDA in their respective petrochemical businesses,” Loeb wrote. (Both first have about $6 billion.) Loeb also analyzed Dow’s capacity against industry average margins and probable feedstock slates to get at the $2.5 billion figure. (LyondellBasell was close to being right where it should be.) Loeb isn’t a big fan of Dow’s strategy of integrating its petrochemicals might with downstream derivatives. This means Dow needs more people, administrative expenses, R&D, facilities, etc. “Dow’s headcount is ~2.5 times more than Lyondell’s, which is not a reflection on poor efficiency, but rather that Dow is engaged in numerous downstream derivatives that Lyondell is not,” he wrote. He wasn’t finished. “Given Dow’s decision to exit chlor-alkali, it appears that Dow believes that its Ag Chemicals and Ag Biology businesses do not derive value-add differentiation from chlorine integration. We take this one step further and question whether Dow’s specialty segments need ethylene or propylene integration.” Loeb makes some good arguments. The transfer pricing point to me is most intriguing. I wonder if the company squanders value by dipping into its presumed feedstock subsidies by underselling rivals. The ability to do that would strike me as a temptation that’s hard to resist. I also wonder if a possible solution is for Dow to throw its U.S. crackers into an master limited partnership, like Westlake is doing. Problem solved.    ...

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The Enterprise Ethane Terminal Is Quite Large (UPDATED)
Apr24

The Enterprise Ethane Terminal Is Quite Large (UPDATED)

As you may have heard, Enterprise Products Partners plans to build an ethane export terminal in Texas. It will have a capacity of 240,000 barrels of ethane per day. Let’s convert that number from the oil perspective into the petrochemical one. According to John Stekla, formally the olefins guru at IHS and now with Williams Cos., 1 million metric tons of ethylene production consumes about 63,000 barrels per day of ethane. So that means that the Williams facility, IF it ran at full capacity would export enough ethane to feed 3.8 million metric tons of ethylene production. That is more than two new world scale ethylene plants. You may be wondering why I have CAPITALIZED, italicized, and bolded the word if in the preceding paragraph. Dow CEO Andrew N. Liveris, at least, is criticizing the project and doesn’t seem to think it would run at full capacity. Dow reflexively complains about every development that could mean petrochemical feedstocks leaving the U.S. They have been fighting hard to block Department of Energy approval of LNG export facilities to non Free Trade Agreement countries. Bloomberg reporter Jack Kaskey knows all this and asked Liveris for his take on the ethane export terminal. Upon hearing an utterance that ends in a question mark, Liveris started talking. “It’s high risk, because the oil-gas arbitrage that we have baked into our assumptions for our investments is half of what it is today.” In other words, oil prices will decline relative to gas prices, which would make the export terminal less attractive. “There is nothing that we see as concerning about that announcement,” he added. (Every time “concerning” is said when “disconcerting” is meant, a kitten falls down a well.) Chemical Notebooks take: If the arbitrage is so fleeting, why is Dow building so much ethylene and propylene capacity on the premise of an enduring advantage? Moreover, if Enterprise truly intends to build the terminal then Enterprise believes that the project will earn its cost of capital. For that matter, companies such as Ineos seem to think that importing ethane from the U.S. also earns the cost of capital of building receiving facilities. What we have here is a mere difference of opinion. Either that, or Liveris isn’t being serious in his assessment or Enterprise isn’t really considering building the terminal. I would add that the premise of the investment is a big glut of ethane. The petrochemical industry isn’t building capacity fast enough to soak it all up. The Enterprise project is timed for 2016, a little in advance of the flood of new ethane capacity. It could be that Enterprise needs to export...

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Dow To Europe: Drop Dead!
Mar26

Dow To Europe: Drop Dead!

I don’t want it to seem like I am picking on Dow this week. This was the first day of IHS’s World Petrochemical Conference in Houston. This is my 15th annual conference. So far, this conference is better than average. The place is packed with more than 1,300 people. Dow executive vice president Jim Fitterling gave an address on the beneficial economic effects of shale. We have been hearing a lot of this kind of thing in recent years. However, Fitterling went way beyond the usual touting of big numbers related to shale petrochemical investment. He said that shale will help lead to a renaissance in American manufacturing in general and is even stimulating greater R&D spending in the U.S. as manufacturers invest in technological research to support their operations. He pointed to Dow’s own planned R&D facility in Lake Jackson, Texas, near its Freeport operations, as an example. Very exciting stuff and very positive. About that headline. He also took the opportunity to complain about all the liquified natural gas export capacity being planned in the U.S. So called “unfettered” exports would drive up natural gas prices and ruin everything for everybody, companies like Dow say. “No it won’t,” oil companies usually retort. Now if you have been following this issue, you might have heard the suggestion that U.S. exports of natural gas to Europe would loosen the energy stranglehold Vladimir Putin has on Europe. “Don’t even go there,” Fitterling said. No, he didn’t say that. Actually he said this: Now we are pointing to the Ukraine and arguing that we must fast track LNG exports to help our allies in Europe. Even our own energy secretary says that’s a weak argument, especially given the long lead time and financing to build these terminals. And let’s not forget, Europe has the resources and the capability to provide for its own energy [consumption]. Just because they have rejected nuclear energy and horizontal drilling, and left themselves at the mercy of others, shouldn’t create an obligation for us to bail them out by shipping our advantage to them. If Europe really wants to be energy competitive and energy secure, it cannot walk away from nuclear and they must embrace horizontal drilling and exploration. The same policies that made America competitive are available to Europe today. The real question we should ask is a simple one: what is our foreign policy, especially when it comes to our valuable energy resources? Shouldn’t we know that with some certainty before we just launch ahead blindly? I heard at least one person attempt to start a round of applause while he was still talking....

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Shale And The Safety Challenge Ahead
Jun21

Shale And The Safety Challenge Ahead

Incidents at chemical plants in Louisiana one week ago left three people dead. Two were killed in an explosion and fire at a Williams Cos. ethylene cracker in Geismar. One died when a nitrogen manifold ruptured at a CF Industries complex in Donaldsonville. A write up by Jeff Johnson and me appears here. The genesis of the story is an interesting one. Last Monday, I called Jeff about blasts. I made the observation that both plants were undergoing work. The Williams plant is being expanded by 50% this year to take greater advantage of shale gas. An ammonia unit at the CF facilities was undergoing a scheduled turnaround. The process of shutting down, working on, and restarting units is a major danger for chemical operators in a similar way that takeoff and landing are the most treacherous moments of flight. Jeff is very aware of this. He owns the Chemical Safety & Hazard Investigation Board beat. He also mentioned to me that the CSB is overtaxed. Its staff of 40 has 15 investigations to cover right now. It hasn’t launched an investigation into CF yet for want of manpower. Shale will lead to a flood of construction the likes of which the U.S. chemical industry has never seen. According to the American Chemistry Council, the amount of capital spending for already announced products is $71.7 billion, and climbing. There will be a big chunk of the chemical industry in the danger zone for accidents. Back in March, I attended a talk at the IHS World Petrochemical Conference in Houston by Richard Meserole, vice president of energy and chemicals construction at the engineering firm Fluor. He had staggering numbers. In just a 50 mile radius from Houston, 45 projects worth $100 million or more will require 20,000 new craft workers. All these skilled laborers such as welders, iron workers, and pipefitters couldn’t even fit into the Toyota Center for a Rockets game. Many of these workers will come from outside the region. Many will be recently trained. And though every construction site—even for a back yard deck—present hazards, are all these workers prepared for the particular nuances of an environment with volatile and highly reactive chemicals? Let us hope that the chemical industry and those regulating it are up to the challenge....

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TPC’s Proxy Decoded
Sep17

TPC’s Proxy Decoded

Last week, TPC put out a proxy statement for its controversial $40.00-per-share sale to First Reserve and SK Capital. Shareholders, as evidenced by quotes between $41.00 and $42.00 for the company, are looking for a better offer. And Sandell Asset Management, which owns about 7% of the firm, has been outspoken against the deal. In such cases, disgruntled shareholders always argue that company management didn’t do enough to shop the company around for a better price. The Chemical Notebook has examined the proxy to get an idea about who was kicking in TPC’s tires and how serious they were: First Reserve (private equity) and SK Capital (private equity): These companies first darkened TPC’s door in early December with a $30.00 to $35.00 offer. This was rejected by TPC management. However, in early January, TPC and these parties signed a confidentiality agreement and First Reserve and SK conducted due diligence. These efforts yielded a $40.00 to $42.50 proposal by mid-February and a merger agreement was drafted. But in March, TPC’s stock price climbed to an all-time high of $47.03, forcing First Reserve and SK to abandon their bid. When the stock price declined back down in May, First Reserve and SK renewed their efforts. This yielded a $40 “best and final” offer in July. On July 27, SK and First Reserve signed an exclusivity agreement with TPC. The deal was announced on August 27. Party A (strategic bidder) and Party B (PE): These firms first signed a confidentiality agreement with TPC in January. Later that month, they decided not to pursue a deal because of other priorities. These parties later emerged from time to time throughout the sale process. In May, they told TPC that they might submit a proposal, but they didn’t. In early August, they indicated that they might be interested again if TPCs stock price declined further. Party C and D (both PE): These companies emerged in late January with a $38 to $38.50 offer. They presented TPC with a draft merger agreement in mid-March. They dropped out in mid-April because of the rising stock price. They reemerged in May 17 but dropped out for good on June 21 because of financing concerns. Party E (strategic): Contacted by TPC representatives in late-February, Party E said that it wasn’t contemplating strategic investments. It told TPC in mid-May that it wouldn’t submit a proposal. Party F (non-U.S. strategic): Expressed interest in early April. It said on May 18 it was interested in a bid. TPC representatives traveled to Party F’s headquarters in early June. At the end of the month, Party F informed TPC that it would not submit...

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Study: Shale Offers Hope For Sunoco Pa. Refinery
Jun28

Study: Shale Offers Hope For Sunoco Pa. Refinery

The advent of natural gas from shale could potentially resurrect an old 175,000 bpd Sunoco refinery in Marcus Hook, Pa., near Philadelphia, according to a new report issued by the consulting firm IHS. The report brainstorms redevelopment concepts and was commissioned by the Delaware County Council, which wants to recover some of the 500 jobs lost when the refinery closed back in December. The Council and IHS came up with ideas that were a lot more creative than what I have usually seen driving by old industrial properties in New Jersey: 1) Leave it to rust until Mother Nature reclaims it. 2) Tear it down and build retail on it. All of the report’s proposals involve hydrocarbon processing of one kind of another. Several of the ideas singled out in the report as having high market viability are relevant to chemicals. These are: 1) Propane Dehydrogenation: Braskem has a polypropylene plant downstream from the refinery and, as I have explained before, is likely on the hunt for feedstock. 2) Integrated ethane cracker complex: ANOTHER cracker? 3) Natural gas liquids processing. Out of these my favorite is the dehydrogenation idea. Though, I have always preferred Philadelphia to Pittsburgh as a location for a Northeast cracker. (Better hydrocarbon infrastructure, plus I can look at it when I pass by on Amtrak on the way back from HQ). NGL processing is promising, too. But why stop there and not create a market for the liquids nearby? The report looked at other options, too. Refined petroleum products storage (boring!), natural gas power generation (bleh!), LNG export terminal (yeah, THAT will happen so close to Philly), gas-to-liquids production (that could cost up to $6 billion, so forget it). Cool report. Kudos to IHS and Delaware County for a lot of creative...

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