Ineos is one of the top petrochemical companies worldwide, with operations in Europe and North America. It was founded in 1998 by chemical engineer Jim Ratcliffe who continues to own 71 per cent of its shares. Other two individuals, Andrew Currie and John Reece, each own 14.38 per cent.

Ineos has two main product lines, Olefins & Polymers and Chemical Intermediates, which include a range of chemical products which are used in a wide variety of consumer and industrial products. Most of them are petrochemicals, meaning that they are produced from oil derivatives (such as naphtha) or/and natural gas liquids (ethane, propane and butane). This has resulted in a general correlation of both outputs prices and costs with gas/oil.

Going one step forward, the large majority of the European petrochemical producers crack the oil-derivative naphtha, whereas the US ones rely on the gas-derived ethane for which prices declined over the last years as a result of the higher shale gas output. Ineos has operations on both continents and the disparities between their margins serves to illustrate the competitive advantage that the US producers had over the recent years due to the shale gas boom.

What happened after the oil prices fell? The prices of Ineos’ products fell bringing a decline in revenues. However, volumes were strong and the profitability improved as the feedstock costs also plunged in response to the lower oil prices. To put some figures into perspective, for the first trimester of 2015, the EBITDA margin stood at 15%, from 9% a year earlier.

Of note, even though the US plants make use of gas-derived products rather than oil-based inputs, their profitability remained resilient. This is because the sharp fall in oil prompted many producers to switch from ethane to propane and, in so doing, they drove a sharp fall in prices. Propane, like ethane, is a gas derivative but in contrast to ethane it is liquid which makes it easy to transport and thus subject to international trade; by extension, the demand for propane is impacted by trends in oil markets and it thus suffered a sharp fall in price. Against this backdrop, the US segment experienced lower costs and robust demand as the economic backdrop here is more supportive than across the Ocean.

Given the higher EBITDA, the operating cash flow improved in Q1 2015 and so did the free cash flow as net capital spending was lower than in Q1 2014. Nevertheless, the book value of net interest bearing debt increased when compared to Dec-14 reflecting the translation effect of a weaker EUR. Even so, the credit metrics were virtually unchanged as EBITDA improved over the period.
Liquidity is as well conveniently good and, following the recent refinancing exercises, the average maturity was extended with significant debt maturities scheduled for 2018, 2022 and 2023.

For high yield bond investors who find this name interesting, it might be worth adding a position in the €6.5 per cent 2018 bond or the USD 6.25 per cent 2018 note.

This article was issued by Raluca Filip, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.