The prospects of propylene trading likely lured Flint Hills Resources to reach a $2.1bn agreement to acquire US-based PetroLogistics, industry consultants said.
Flint Hills is mostly self-sufficient in propylene since it owns refineries as well as a cracker in Texas. Occasionally the company even sells the monomer.
PetroLogistics would give Flint Hills a lot of propylene capacity. It owns the sole propane dehyrogenation (PDH) unit in the US currently, and it has a propylene capacity of 1.45bn lb/year (658,000 tonnes/year).
PetroLogistics owns sole US plant
PetroLogistics would add a significant amount of propylene to that trading mix. PetroLogistics’s PDH plant has several qualities that make it attractive for trading, said Dan Lippe, president of Petral Consulting.
The plant is on the Houston Ship Channel, a great site, he said, adding: “It has excellent pipeline interconnections between the plant site and storage facilities in Mont Belvieu. This factor adds value from a propylene trading perspective.”
Since the PetroLogistics plant uses propane as a feedstock, it would give Flint Hills an easy way to make a shale gas play, said Robert Bauman, president of Polymer Consulting International.
“A play in olefins to me is a good financial move,” Bauman said. “People are making more money in olefins than they are in derivatives.”
For propylene, the US market will likely be tight until a wave of new PDH plants starts operations in the second half of the decade, said Peter Fasullo, principal at En*Vantage.
The PetroLogistics acquisition gives Flint Hills an immediate position on propylene before these new PDH plants start up.
While PetroLogistics’s propylene is currently under contract, the first of those agreements ends in December, according to the company’s latest quarterly earnings statement. Others expire in 2016-2018.
Flint Hills said that the acquisition is complementary with minimal overlap among its current assets.
“PetroLogistics’s unique capabilities will help us expand our existing chemical and refining business,” Flint Hills said. “There are also pipeline and supply synergies that will help us create additional value for our customers. We will continue to serve the customers of the business but will look for synergies with our existing business in the future where it makes sense.”
Flint Hills will acquire all of PetroLogistics’s outstanding common units for $14/common unit in cash, except for those common units owned by private equity firms Lindsay Goldberg and York Capital Management, as well as PetroLogistics’s executive chairman and its president and CEO. Their units will be acquired for $12/unit in cash.
Based on the closing unit price on 27 May, the $14/unit purchase price represents a premium in excess of 8%. The companies expect to complete the deal before the end of the year.
PetroLogistics may be looking ahead to the rash of new PDH plants and another methane-to-propylene project planned in North America.
“I believe there is a defensive element to the decision by Petrologistics to sell now and at that price. With regard to Koch, it is less transparent as to why they want to buy the company. It is a reasonable extension of their polymers/petrochemicals business,” said one investment banker.
“However, as a privately owned chemical company they are less predictable and less public about what their acquisition strategies and targets are. At times they have gone after commodity chemicals in the US like the Huntsman business they bought years ago, and at other times where they have pursued specialty chemicals,” the banker added.
Meanwhile, another buyer has until 6 July to make a competing offer for PetroLogistics. Units of PetroLogistics traded above the $14/unit offer in the days after the announcement, implying that the market expects a higher bid.
PetroLogistics had been considering an expansion project that would add 1.6bn lb/year of propylene capacity. The company actually got the project permitted, CEO Nathan Ticatch said during an earnings conference call. Nonetheless, it put the project on hold.
Construction costs had risen significantly since the completion of the company’s first PDH plant in 2010, Ticatch said. At the time, that plant cost $640m, Ticatch said. Now, that very same plant would cost more than $1bn.
Flint Hills would not comment about the specific PetroLogistics permit. However, the company would certainly have the resources to take on such a project, Fasullo said.
The PetroLogistics project was one of nine announced in North America. If all of those plants were built, they would add more than 5bn/year of propylene capacity. This would be on top of the world-scale methane-to-propylene complex that BASF may build in the US.
It is unclear where all of this propylene would go, Bauman said.
There have been remarkably few − if any − expansion projects for polypropylene (PP), the major end user of propylene, Bauman said. Instead, almost all of the propylene from the PDH plants would be for the merchant market.
“To me, I start seeing these propylene plays going on, and I think, ‘Where is it going’?” Bauman said.
Some of it could go to under-utilised plants and to replacing the propylene lost from cracking lighter feeds.