JPMorgan upgrades Dow to ‘overweight’

29 April 2011 21:16  [Source: ICIS news]

NEW YORK (ICIS)--JPMorgan upgraded US-based Dow Chemical from “neutral” to “overweight” on Friday, citing the structural advantage of North American ethylene producers as a result of cheap ethane feedstock.

“We now recommend Dow because we believe that the North American ethylene producers have structural advantages versus offshore naphtha producers, and Dow Chemical’s high level of free cash flow generation creates an excellent risk/reward opportunity,” said Jeffrey Zekauskas, an analyst at the US-based investment bank.

Dow plans to build a cracker on the US Gulf coast by 2017, and two propylene units - one by 2015 and the other by 2018.

The company is also bringing up an 850m lb/year (386,000 tonne/year) cracker in St Charles, Louisiana, US and plans to access an additional 800m lb/year of ethane-based ethylene capacity, the analyst noted.

The argument for a petrochemical “supercycle” in profitability for North American producers rests on the price differential between crude oil-based naphtha and natural gas-based ethane, he said.

“The element of truth in the ‘supercycle’ thesis might be stated in this way: Should global oil prices and domestic gas remain relatively constant, the coming petrochemical peak is likely to be larger or more profitable, and certainly no less profitable, than peaks of the recent past because a raw material differential would supplement the positive margin effects of tightness in the supply/demand balance,” said Zekauskas.

US ethane, at about $0.88/gal, is a very profitable feedstock for petrochemical producers and equivalent to about $70/bbl (€47/bbl) oil, he added.

Zekauskas also said that the recent announcements by Dow and US-based Chevron Phillips Chemical to build new crackers is more positive than negative for North American petrochemical profitability.

“They indicate the possibility of a relatively large potential supply of ethane available for petrochemical producers,” he said.

Dahlman Rose &Co, meanwhile, maintained its “hold” rating for Dow.

“We are seeing initial signs that the Rohm & Haas acquisition and the high price paid for those assets are beginning to drive Dow's performance growth, Dahlman Rose said. “We await better traction before raising our Hold rating as we see current risk/reward balanced at current price levels and shares trade generally in line with peer multiples.”

Shares of Dow on the New York Stock Exchange closed on Friday at $40.97, up 26 cents.

($1 = €0.67)

Additional reporting by Brian Ford

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