7 Best and Worst Chemical Stocks for the Era of Lower Oil Prices

NEW YORK (TheStreet) -- Companies across sectors are feeling the effects of oil dropping to record lows -- with some stocks experiencing bounces while others are not faring as well. Chemicals companies are among those that stand to gain -- and lose -- the most. 

Morgan Stanley (MS) research analysts took a deep dive across the firm's entire North America coverage universe to assess how "a sustained period of lower oil prices" would affect various sectors and stocks.

The Dec. 22 report "highlights stocks for which the effect would be most beneficial, or most challenging," it said. The analysts identified more than 30 industries in which "an extended period of low energy prices would have a material effect," and more than 120 stocks where the effects would be either "especially favorable or unfavorable."

Chemicals companies that are set to benefit include those that manufacture products such as industrial coatings, adhesives, alcohols, fibers, and solvents, the report said.

"Crude derivatives like propylene are a key raw material for paint and coatings companies," the report said. "Propylene derivatives are present in industrial products like adhesives, coatings, floor tiles, and polyurethanes. Depending on the specialty nature of the downstream product, consumers of propylene may be able to keep pricing elevated, while benefitting from reduced input costs. Propylene prices typically follow crude oil prices and we expect coatings companies in particular to maintain price despite lower COGS."

On the other hand, petrochemicals companies where "profitability is a function of the individual position on the global cost curve" could be challenged, the report said. "Crude oil derivative producers (Europe & Asia) have been on the high end of the cost curve for a number of years, whereas the shale gas expansion in the U.S. has moved U.S. producers to the low end of the curve (just above the Middle East). Therefore, as oil prices decline, the U.S.'s advantaged cost position deteriorates."

Click through to see which chemicals stocks made Morgan Stanley's list as either materially benefitting or being challenged.


PPG Industries Inc. (PPG)

Position: Likely beneficiary

Year-to-date return: 22%

Morgan Stanley said: PPG's coating formulations are ~65% industrial and ~35% architectural. Crude-oil derivatives (propylene in particular) typically comprise 60-80% of the raw material inputs used to produce industrial coatings, and ~50% for architectural coatings (70-80% of COGS are raw material inputs).

 

RPM International Inc. (RPM)

Position: Likely beneficiary

Year-to-date return: 24%

Morgan Stanley said: RPM is a decentralized holding company that owns a collection of coatings-related businesses, and while the diversity of RPM's products makes it difficult to quantify precisely its exposure to a sustained decline in crude, we do expect a meaningful input cost tailwind for the company in 2015.

Eastman Chemical (EMN)

Position: Potentially challenged

Year-to-date return: -4.7%

Morgan Stanley said: Eastman's commodity products include propylene derivatives used for coatings and adhesives (these represent ~44% of company EBITDA post the Taminco acquisition). As the price of propylene goes lower, Eastman's downstream products could face pricing pressure, though many are specialty products which are not repriced for feedstock costs, good - bad - or indifferent. Meanwhile, Eastman produces these products by cracking propane and it has hedged its 2015 propane exposure at ~ $1.00/gal, vs. the current ~ $0.55/gal spot price.

 

Sherwin-Williams Co. (SHW)

Position: Likely beneficiary

Year-to-date return: 44%

Morgan Stanley said: SHW's coating formulations are predominantly architectural, for which crude-oil derivatives (propylene in particular) typically comprise ~50% of raw materials (70-80% of COGS are raw materials).

LyondellBasell (LYB)

Position: Potentially challenged

Year-to-date return: 2.7%

Morgan Stanley said: LYB's Olefins & Polyolefins - Americas business (55% of EBITDA) has similar economics to DOW's performance plastics business and primarily sells polyethylene (plastic resins). LYB's O&P segment faces pressure from lower selling prices as oil heads lower. In addition, the company previously indicated that ~ 13% of its resins were sold into export markets - export markets are the first to experience price degradation. LYB additionally has an international segment (17% of EBITDA) that produces the same products, but has a higher cost base (more oil- based) and thus will provide some offset from lower input costs (though we note that the company has made efforts to lighten its international feedslate, which should mitigate the effects of this offset to a certain extent).

Valspar Corp. (VAL)

Position: Likely beneficiary

Year-to-date return: 23%

Morgan Stanley said: VAL's coating formulations are ~60% industrial and ~40% architectural. Crude-oil derivatives (propylene in particular) typically comprise 60-80% of the raw material inputs used to produce industrial coatings, and ~50% for architectural coatings (~70-80% of COGS are raw material inputs).

The Dow Chemical Co. (DOW)

Position: Potentially challenged

Year-to-date return: 3.6%

Morgan Stanley said: Dow's performance plastics business (46% of EBITDA) primarily sells polyethylene (plastic resins). Polyethylene is a globally traded product whose price is determined globally by crude oil based producers (i.e., naphtha-based producers in Asia). Thus, as the price of oil goes lower, polyethylene prices face downward pressure which could hurt Dow's earnings power. Nonetheless, we estimate that ~25-30% of this segment's business is non-US (i.e. high-cost regions) which would provide an offset as their costs may work down with oil. In addition, Dow's US business buys ~ 3.3Bn lbs. of merchant ethylene, so it stands to benefit from lower ethylene prices.

 

- Written by Laurie Kulikowski in New York.

More from Investing

PepsiCo Declares War on Coca-Cola

PepsiCo Declares War on Coca-Cola

Illinois Tool Works Slips on Weak Auto Segment as Results Beat Estimates

Illinois Tool Works Slips on Weak Auto Segment as Results Beat Estimates

6 Key Numbers to Look for When Amazon Reports First-Quarter Earnings

6 Key Numbers to Look for When Amazon Reports First-Quarter Earnings

UPS Rises After Better-Than-Expected Revenue

UPS Rises After Better-Than-Expected Revenue

How to Play Microsoft Stock and Tonight's Crucial Earnings Results

How to Play Microsoft Stock and Tonight's Crucial Earnings Results