How Dow Chemical May Be Escaping Low Energy Prices

The company reported an operating rate of 86% for the quarter, up four percentage points from the fourth quarter from the previous year. This represents the fifth consecutive quarter of year-over-year operating rate increases. Cash flow from operations was $2.8 billion for the quarter, an increase of over $500 million from the previous year.

As a result of falling oil prices, Merrill Lynch recently remained cautious on the sector as a whole. The brokerage firm is expecting these companies to take a hit from the falling oil prices and seems to be opposed to the more positive outlook that the CEO has. It turns out that Dow may be escaping that trap, and CEO Andrew Liveris even pointed out that some benefits they are seeing.

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Over the course of the fourth quarter, Dow returned $1.6 billion to shareholders through declared dividends and repurchases, and it completed its $4.5 billion repurchase program. This quarter, the company announced a 14% dividend increase and expanded its share buyback program by an additional $5 billion.

Dow reported its segments fourth-quarter revenue compared to the previous year:

• Agricultural Sciences was up 5% to $1.9 billion.
• Consumer Solutions remained flat at $1.1 billion.
• Infrastructure Solutions was down 4% to $2 billion.
• Performance Materials & Chemicals grew 5% to $3.9 billion.
• Performance Plastics was down 3% to $5.5 billion.

Liveris, who is chairman as well as CEO, stated:

This is nine quarters in a row of these metrics increasing year over year. Our operating model of integration with geographic and market diversification showed its superiority during volatile commodity environments, as evidenced by demand growth in most segments. Our strategic decisions continued to drive long-term value across Dow’s integrated, diversified portfolio, while our self-help and productivity measures are firmly delivering cash and lowering costs.

Liveris would continue to comment on the outlook in relation to oil prices:

Our differentiated technologies and end-market selection will enable us to maximize returns in sectors less susceptible to pricing volatility. Our business model works across all economic cycles, as we can extract value through different parts of our integrated value chains — depending on the cycle. We believe lower oil prices are a relative positive for Dow and a boost for the global economy.

Lower oil prices are a very real threat for the U.S. chemicals sector. As a result, oil prices will translate to lower earnings due to a compression of the oil/gas ratio, a consequent flattening of global cost curves, lower selling prices for petrochemicals and lower unit margins. Still, this does at least lower many of their input costs.

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Shares of Dow Chemical closed Wednesday down 2.6% at $43.03. Following the release of the earnings report, the initial response in the premarket was positive and shares opened at $44.07. The stock has a consensus analyst price target of $51.10 and a 52-week trading range of $41.45 to $54.97.