Summary
Westlake Chemical has been plagued with oversupply worries over the past several years. Chinese tariffs have made that worse.
If tariffs remain in place, there might not be a home for all the new competing ethylene supply and its associated downstream products in global markets ex-China.
Management is not as worried as the market, citing Chinese willingness to make exceptions for products it cannot supply internally.
The crude/natural gas differential - a key component of the Westlake production advantage - is widening. Profits might surprise.
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Plenty of otherwise solid firms have sold on Chinese tariff fears; Westlake Chemical (WLK) is one of them. This juggernaut has been one of the prime beneficiaries of cheap shale gas, and current widening differentials between natural gas and crude oil would be driving future EBITDA margins higher – if that was the only consideration. Instead, long-running fears of oversupply have hit the company’s markets, particularly as the Chinese are set to limit importation of certain chemicals products due to trade wars. For anyone who feels that Trump does understand the “Art Of The Deal” and a compromise will be reached, Westlake Chemical represents a promising opportunity. On the other hand, for anyone cautious on Chinese GDP growth expectations or that global trade wars are just getting started, there likely's a little more downside ahead for this firm. With that said, the low leverage and current high free cash flow due make it a likely survivor in all but the worst-case scenarios. I’m not a buyer yet, but I’m watching closely should we see a dip into the low $70s per share.
