Westlake Chemical Cuts Planned Capex as Future Outlook Remains Uncertain

Researched by Industrial Info Resources (Sugar Land, Texas)--Petrochemical producer Westlake Chemical (NYSE:WLK) (Houston, Texas) is being cautious with spending as the company faces reduced demand for some products and has lost cost-advantaged feedstock gains for ethylene as the price of oil has declined. The company has cut planned 2020 capital expenditures (capex) from its originally planned $650 million-$700 million to $500 million-$550 million.

In Monday's conference call with analysts, Chief Executive Officer Albert Chao discussed how the company was weathering the current environment. Westlake's operations were deemed an essential service by the U.S. government, so the company has maintained operations with certain health and safety measures in place. Chao outlined the importance of Westlake's products in the midst of the pandemic. These include polyethylene used in medical applications and food packaging; polyvinyl chloride (PVC) that is used in medical equipment and supplies; and chlorine and caustic soda, used for water treatment, disinfectants, paper tissues and cardboard packaging manufacturing.

Chao said the company's polyethylene segment was continuing to see good demand, particularly for food packaging as more individuals consume food items from grocery stores. He said that in Westlake's PVC and vinyls products businesses, after a very good start to 2020, late in the first quarter, the company saw a broad decline in demand led by lower construction activity, housing starts, general manufacturing and industrial activity resulting from the restrictions many governments around the world put in place.

Westlake also is losing the cost advantage that low U.S. natural gas prices gave when compared with international producers that use naphtha-based feedstock. Chao said, "While our ethane feedstock costs have decreased, our competitive advantage versus oil-based feedstock has been eroded by the 68% decline in oil price we have seen so far this year. Our naphtha-based international competitors are benefitting from these reduced costs due to the significant decline in global oil prices. As a result of these lower global production costs, industry consultants expect to see polyethylene prices and gas-based polyethylene producers' margins decline while oil remains at these depressed prices."

Among the company's projects that have been affected is a planned turnaround to its 1.6 billion-pound-per-year Petro II ethylene unit in Lake Charles, Louisiana. The turnaround was originally planned for the second half of this year, but has now been rescheduled for the first half of 2021. The project also was to perform tie-ins to support upgrades that include a new wash tower, condensers, heat exchangers and other equipment. For more information, see Industrial Info's project report on the maintenance turnaround and equipment additions.

Westlake projects that are underway and planned to be wrapped this year include the expansion of its PVC and vinyl chloride monomer (VCM) plant in Plaquemine, Louisiana. The project includes construction of a new furnace to increase plant capacity by approximately 150 million to 200 million pounds per year of PVC resins and approximately 100 million to 200 million pounds per year of VCM. Civil construction kicked off last summer, and the project is planned for completion in the fourth quarter of this year. For more information, see Industrial Info's project report.

Westlake reported first-quarter 2020 net income of $145 million, compared with $72 million in the prior-year quarter. The just passed quarter included an income tax rate benefit of $62 million, as permitted under the CARES Act passed by Congress in late March.

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