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The Shale Advantage: 3 Chemicals Picks - Analyst Blog

By: Zacks.com
Posted: 1/10/2014 12:59:00 PM
Referenced Stocks: ACC;CHK;CVX;EOG;LYB

According a report released by the American Chemistry Council (ACC), U.S. chemicals exports are poised to rise significantly in the near future. Exports have already increased in 2013, primarily due to a spurt in shale gas production.

A Spurt in Exports

According to the ACC, the industry association of chemicals producers, U.S. chemicals exports will increase 45% over the next five years. These exports will be made possible by investments which will substantially increase capacity.

In fact, such capacity has been created to cater to burgeoning export demand. From a net importer of chemicals in 2011, the U.S. has now become a major player in export markets. In 2013, net export value for chemicals was $2.7 billion. The ACC expects this figure to rise to $30 billion by 2018.

The ACC expects U.S. chemical production to increase by 2.5% in 2014 and 3.5% in 2015. Higher external demand for plastic resins and organic chemicals is also expected going forward, the ACC said.

The Shale Advantage

An increase in the production of shale gas and liquids is the primary reason for the resurgence of the U.S. chemicals sector. Affordable natural gas and ethane present U.S. producers with a compelling cost advantage over their global counterparts who use a more expensive, oil-based feedstock.

The ACC report indicates that over 50 projects worth $40 billion will be operational in the next few years. The leading players in the U.S. shale arena include Chesapeake Energy Corp. ( CHK ), EOG Resources, Inc. ( EOG ), and Chevron Corp. ( CVX ).

3 Chemicals Picks

The increase in shale gas production has provided a boost to the entire chemicals sector. Below we present three companies gaining from the shale effect, each of which also have a good Zacks rank.

LyondellBasell Industries

LyondellBasell Industries NV ( LYB ) is a prominent plastics, chemical and refining company. The company said that it has restarted its methanol plant at Channelview, Texas, in fourth-quarter 2013 to benefit from low-cost natural gas from shale formations.

Methanol is used to make chemicals such as acetic acid and formaldehyde as well as several other products. Natural gas is a key feedstock for producing methanol.

LyondellBasell holds a Zacks Rank #2 (Buy) and has expected earnings growth of 17.50%. The forward price-to-earnings Ratios (P/E) for the current financial year (F1) is 11.24.

OCI Partners

OCI Partners LP ( OCIP ) was hived off in early 2013 from OCI NV, which is a Netherlands based construction contractor and fertilizer producer. The company produces methanol and ammonia at an integrated plant at Beaumont. The facility enjoys a strategic location on the Texas Gulf Coast.

Currently, the company produces 730,000 metric tons of methanol and 265,000 metric tons of ammonia per year. In late 2013, the company said it was setting up a plant which will produce 5,000 metric tons of methanol per day.

OCI believes that when completed in 2016, this will be the largest methanol producing facility in the U.S. Currently the company holds a Zacks Rank #2 (Buy) and has expected earnings growth of 8.80%. It has a P/E (F1) of 11.80.

PPG Industries

Ourthirdchoice is PPG Industries Inc. ( PPG ). The company supplies protective and decorative coatings worldwide. It operates across several business segments. These include performance, architectural and industrial coatings.

Following the divestiture of its basic chemicals business, it may not gain as much from the shale advantage. However, its glass and fiber glass businesses still use natural gas and it may be able to leverage the situation indirectly.

The company believes that it could become a key supplier of coatings as well as fiber glass pipes which could be used in natural gas drilling operations. Besides a Zacks Rank #2 (Buy), the company has expected earnings growth of 11.50%. It has a P/E (F1) of 20.05.

The increase in shale gas production and the resultant lowering of prices has resulted in benefits which are expected to continue, at least over the medium term. This is why these three choices would make good additions to your portfolio.



CHESAPEAKE ENGY (CHK): Free Stock Analysis Report

CHEVRON CORP (CVX): Free Stock Analysis Report

EOG RES INC (EOG): Free Stock Analysis Report

LYONDELLBASEL-A (LYB): Free Stock Analysis Report

OCI PARTNERS LP (OCIP): Free Stock Analysis Report

PPG INDS INC (PPG): Free Stock Analysis Report

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