As you may have noticed, energy prices are on the way down. Oil continues to hit new five-year lows, while natural gas has stalled as forecasts for a long cold winter havn’t materialized just yet. The dip has removed much of the wind from energy stocks’ sails. For example, oil and gas producer EOG Resources Inc (EOG) has fallen 17% in the past six months.
However, while some energy stocks have been hurt by lower energy prices, other companies have benefited tremendously. One such sector has is chemical stocks. Oil and gas are the feed stocks needed to do their business. Producers of various chemicals — both specialized and commodity — have been able to spend less on oil and natural gas. That should translate into beefy margins and ultimately big gains for investors.
Lower Costs For the Chemical Stocks
This trend should continue for the next few years. Hydraulic fracturing is unearthing an abundant supply of natural gas, oil and liquefied natural gas. And thanks to OPEC’s decision not to cut crude output, prices for all forms of oil continue to drop. Some analysts are even calling for $40 per barrel oil.
The global oversupply of crude oil has U.S. West Texas Intermediate oil currently trading at its lowest levels since September 2009. European benchmark Brent crude is at its lowest point since 2010.
Similarly, prices for natural gas have been trending lower over the last year or so. As this winter’s anticipated Polar Vortex Part 2 has not yet materialized, natural gas prices have dropped about 17% in just the last two weeks.
For chemical stocks, this new low-priced environment allows them to acquire materials at cheaper prices. Consider this: lower oil prices help drive down the price of propylene. The byproduct of oil refining is used making paints and other coatings. Lower oil also helps chemical companies that produce synthetic lubricants. Meanwhile, firms with facilities located in Europe and other international locations are able to use oil-derived naphtha to make ethylene at much cheaper rates.
A New Environment for Chemical Stocks
As for those producers here in the U.S., rising natural gas production continues to drive down the prices of propane and ethane. Both are sent through a refining process and “cracked” in similar fashion to crude oil to produce some of the most basic commodity chemicals. These are key components in plastic, paint, glue and other products.
Investors should also consider the global backdrop of rising economic growth.
According to recent data from the IMF, the world’s economy grew over 3.3% in this year and will likely grow at a rate of 3.8% in 2015. However, these predictions were made before the recent oil price drop. All in all, lower oil prices should mean increases in gross domestic products (GDP) in several key developed nations — the U.S., U.K, Japan and China — as a whole host of industries benefit. That will ultimately drive up demand for basic and specialty chemicals.
At the end of the day, the chemical stocks are set up for a strong 2015.
2 Chemical Stocks to Buy
After coming under attack from activist investors, venerable chemical stock Dow Chemical Co (DOW) is an interesting play. The firm continues to dispose of non-core assets with highly variable earnings. For example, it recently divested of its Sodium Borohydride business and its polyolefin films facilities. That’s allowing DOW to focus on specialty chemicals and its core plastics business.
The plastics business has been on fire lately. In the last quarter, DOW saw a 31% increases in profits in the segment. With chemical plants in both the U.S. and in Europe, Dow should be able to take advantage of lower natural gas and oil costs. DOW stock can currently be had for a forward price-to-earnings ratio of 14 and a juicy 3.3% yield.
For PPG Industries, Inc. (PPG), lower energy prices are a great bit of news. Dwindling costs for oil/propylene will help in its main business — producing paint and coatings. While lower natural gas helps on its glass, fiber glass and commodity chemicals side. All in all, lower materials costs will drive the firm’s current earnings, which have been stellar recently.
Longer term, PPG continues to dive head first into new coatings markets. That’s been driven by acquisitions such as recent buy of a leading Mexican paint company the North American architectural coatings business of Akzo Nobel N.V. (ADR) (AKZOY).
While it does have some exposure to housing, PPG is very much an industrial play — the bulk of PPG’s products are designed for aerospace, defense, automotive and industrial applications. That means, PPG should get a boost from lower oil-driven GDP growth as well.
Despite its run-up over the last year or so, PPG stock is still cheap. Currently shares can be had for a P/E of just 13 and a 1.2% yield.
The Bottom Line
While lower energy prices are hurting some producers of oil and natural gas, the end users of the fuel are feasting. The stocks of chemical companies PPG and DOW are just two of the buying opportunities in the sector.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.