Short-Term Costs in 2016 Should Subside for Westlake; Raising Fair Value Estimate to $45

Westlake reported lower 2016 results compared to 2015, with EBITDA declining 18% to $1 billion. Contracting olefin margins, higher turnaround costs, unplanned outages, and integration-related expenses more than offset the higher sales volumes from Axiall (which closed in the third quarter). While we expect ethylene margins to remain low going forward, expenses totaling roughly $260 million should be largely transitory as the company completes the turnaround and integration. With the debt-funded acquisition of Axiall, Westlake has also increased its debt to more appropriate levels (from less than 10% of enterprise value to roughly 30%), lowering our estimated cost of capital from 10% to 8.5%. Based on normalizing profits as one-time costs subside and a lower cost of capital, we are increasing our fair value estimate for Westlake to $45 from $40. Our narrow moat rating remains intact.