Propylene trading likely attracted Flint Hills to PetroLogistics

HOUSTON (ICIS)–The prospects of propylene trading likely lured Flint Hills Resources to reach a $2.1bn agreement to acquire US-based PetroLogistics, industry consultants said on Wednesday.

Flint Hills is mostly self-sufficient in propylene since it owns refineries as well as a cracker in Texas. Occasionally the company even sells the monomer.

PetroLogistics would give Flint Hills a lot of propylene capacity. It owns the sole propane dehyrogenation (PDH) unit in the US currently, and it has a propylene capacity of 1.45bn lb/year (658,000 tonnes/year).

Flint Hills is part of Koch Industries, which is already among the biggest ethylene traders in the US.

PetroLogistics would add a significant amount of propylene to that trading mix.

PetroLogistics’s PDH plant has several qualities that make it attractive for trading, said Dan Lippe, president of Petral Consulting. 

The plant is on the Houston Ship Channel, a great site, he said, adding: “It has excellent pipeline interconnections between the plant site and storage facilities in Mont Belvieu. This factor adds value from a propylene trading perspective.”

Since the PetroLogistics plant uses propane as a feedstock, it would give Flint Hills an easy way to make a shale-gas play, said Robert Bauman, president of Polymer Consulting International.

“A play in olefins to me is a good financial move,” Bauman said. “People are making more money in olefins than they are in derivatives.”

For propylene, the US market will likely be tight until a wave of new PDH plants starts operations in the second half of the decade, said Peter Fasullo, principal at En*Vantage. The PetroLogistics acquisition gives Flint Hills an immediate position on propylene before these new PDH plants start producing the monomer.

While PetroLogistics’s propylene is currently under contract, the first of those agreements ends in December, according to the company’s latest quarterly earnings statement. Others expire in 2016-2018.

In a statement, Flint Hills said that the acquisition is complementary with minimal overlap among its current assets.

“PetroLogistics’s unique capabilities will help us expand our existing chemical and refining business,” Flint Hills said in a statement. “There are also pipeline and supply synergies that will help us create additional value for our customers. We will continue to serve the customers of the business but will look for synergies with our existing business in the future where it makes sense.”

Under the terms of the deal, Flint Hills will acquire all of PetroLogistics’s outstanding common units for $14/common unit in cash, except for those common units owned by private equity firm Lindsay Goldberg, York Capital Management, PetroLogistics’s executive chairman and its president and CEO. Their units will be acquired for $12/common unit in cash.

Based on the closing unit price on 27 May, the $14.00/unit purchase price represents a premium in excess of 8%, the companies said.

The companies expect to complete the deal before the end of the year, subject to closing conditions and regulatory approvals.

Meanwhile, another buyer has until 6 July to make a competing offer for PetroLogistics.

The acquisition of PetroLogistics would be the largest in Flint Hills’s history.

The following is a breakdown of the largest customers of PetroLogistics:

Source: PetroLogistics

Additional reporting by Stefan Baumgarten