Ethane can be “cracked” in a refining process to create one of the basic commodity chemicals, ethylene. From there, it can be used to make everything from plastic bottles to baby diapers. And given the low prices for ethane, margins at several chemical manufacturers are now at huge historic highs.
For investors, adding a dose of the chemical producers could be exactly what their portfolio needs. Here are two of the best.
Low ethane prices have been a boon for Westlake Chemical (WLK). That’s because the firm solely operates in the commodity chemicals business — with ethylene and its derivatives as its main products. Those low feedstock prices, along with strong margins have helped Westlake’s profits pop nearly 26% year-over-year during the last reported quarter. The company has also managed to provide positive earnings surprises for the past four quarters by beating analyst expectation by an average of 18.5%.
Investors in Westlake have been benefiting as well.
Aside from the fact that WLK stock is up about 30% year-to-date, the company recently decided to spread some of its good fortunes back to investors via a big bump in its quarterly dividend. The firm recently upped its dividend by 20%, even after 2012’s huge 150% increase to its dividend.
With plenty of new ethylene projects underway and margins continuing to be quite juicy, investors in Westlake can expect similar dividend increases down the road. WLK shares currently trade for a forward P/E of less than 12.
Like Westlake, LyondellBasell (LYB) is making a killing from cheap U.S. natural gas. The chemical firm produces ethylene at a cost of around 10 cents per pound. That helps provide some of the largest margins in the business. European and Asian rivals make the commodity chemical for around 50 cents per pound. Given that huge spread, LyondellBasell expects profits will jump about 17% next year.
However, the company isn’t just a one-trick pony with regards to growing production due to fracking.
LYB is also taking advantage of low natural gas prices with the production of methanol. The firm’s Channelview Plant in Texas has been idled for more than decade as natural gas prices previously surged. The restarted plant will produce around 260 million gallons of methanol every year and contribute about $250 million to Lyondell’s earnings.
Shares of the firm are up about 32% this year, and LYB continues to reaffirm and raise its dividend. The stock currently yields 2.5% and can be had for a forward P/E of just 10.
The bottom line: Both Westlake and LyondellBasell can be your ticket to sustained lower NGL and natural gas prices for the next few years.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.