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Goldman Sachs Says Propane Is 'Underappreciated'

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In a report published Wednesday, Goldman Sachs analyst Robert Koort commented that benchmark propane prices traded below $0.40 per gallon for the first time in over a decade with Mt. Belvieu prices trading as low as $0.34 per gallon before closing at $0.39 per gallon. This compares to propane prices of $1.05 per gallon last year, and a 2014 average price of $1.04 per gallon.

Koort said current propane inventories are 89 percent higher than their 20-yer average for this time of the year. In the heavily-seasonal propane market, inventories are currently higher than even their 20-year average for October which marks the seasonal peak before heating season begins. In addition, the analyst suggested that there are "real concerns" that the U.S. will run out of storage capacity before October 2015.

With that said, the analyst noted that drop in propane prices will stimulate increased use as a petrochemical feedstock for ethylene production. One of the largest beneficiaries will likely be Dow Chemical Co (NYSE: DOW) as propane is used for roughly 40 percent of its U.S. feedslate.

According to Koort's estimates, Dow Chemical consumers over two billion gallons of propane per year in the U.S. (not including their PDH plant under construction) indicating that just a $0.10 per gallon shift in propane costs could reduce its costs by $200 million per year.

Koort revised his 2015, 2016 and 2017 earnings per share for Dow Chemical to reflect lower propane prices. The company is now expected to earn $3.03 in 2015, $4.09 in 2016 and $4.70 in 2017. This compares to the analyst's prior earnings per share projections of $2.96, $3.95 and $4.55 for 2015, 2016 and 2017, respectively.

Shares remain Buy rated with a sum of the parts valuation raised to $65 from a previous $64.

Latest Ratings for DOW

DateFirmActionFromTo
Jan 2022Goldman SachsMaintainsNeutral
Jan 2022Goldman SachsMaintainsNeutral
Jan 2022MizuhoMaintainsNeutral

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Posted-In: ethylene Goldman Sachs PDH Plant propaneAnalyst Color Commodities Markets Analyst Ratings

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