The IRS Has 1 Word of Advice for You: Plastics

Westlake Chemical Corp. is planning an IPO of its ethylene making business. It means just one thing: The IRS is now blessing an investment in plastics.

Apr 30, 2014 at 1:10PM
 Plastics

Source: Flickr/woodleywonderworks.

In the 1967 movie "The Graduate," Benjamin Braddock, played by Dustin Hoffman, is a recent college graduate worried about his future. In the movie, he's given one word of advice that was meant to set him on a profitable course in life. That famous word is plastics. He was told that there would be a great future in plastics and was urged to think about a career in the field. 

The new plastic revolution
Fast forward nearly five decades, and we stand at the forefront of a future where plastics could yet again represent a great future opportunity. It's a future that even the IRS sees as being an important one for our country. That's why it ruled in October 2012 to allow companies that convert ethane and other natural gas liquids into olefins, such as ethylene could to be classified as master limited partnerships. What that means is that now these makers of the basic building blocks of plastics can now avoid the double taxation of a corporation.

It's almost as if the IRS is now giving chemical companies and investors the same advice Mr. McGuire gave Benjamin Braddock, which is to invest in plastics. While it took nearly two years for the first plastic maker to take advantage of this tax-advantage, we now have a first-mover. Westlake Chemical (NYSE:WLK) is that company as it is the first U.S. plastics maker to take advantage of the IRS ruling as it is now planning an IPO for its MLP Westland Chemical Partners LP.

The Westlake Chemical MLP will own the company's three U.S. ethylene plans as well as a 200-mile ethylene pipeline. The company plans to raise about $272 million in the IPO, which is likely to be the first of many public offerings of units by the new MLP. Westlake said it plans to use the MLP to operate, acquire, and develop ethylene production facilities, so it's likely to use these units as currency to grow the business.

First, but not the last
Westlake is likely just the first of many plastic makers to use the IRS rule change to make more money on plastics. Huntsman (NYSE:HUN), for example, has already stated that it would be open to following Westlake's move and create its own MLP. After that, companies like Dow Chemical (NYSE:DOW) could follow suit. Dow Chemical in particular might not have much of a choice, as it could be forced to bow to activist pressure and create an MLP to house some of its assets in order to benefit from the value differential between a C-Corp and an MLP.

G

Source: Dow Chemical.

Dow Chemical is currently battling hedge fund manager Daniel Loeb. He's pressuring the company to spin off its slow-growing petrochemical unit and focus on specialty materials. That being said, Dow Chemical believes any move to break apart its business would hurt the value of the company as opposed to enhance its value.

However, if the Westlake Chemical Partners IPO is well received, and the MLP creates value, then both Dow Chemical and Huntsman will at least need to explore the MLP option. Both companies are already spending hundreds of millions of dollars in capital spending to boost capacity to take advantage of America's cheap natural gas. Using the tax advantage of an MLP could help both companies cheaply raise capital to fund the building boom -- and earn a better return in the process.

Investor takeaway
Petrochemical manufacturers now have two very important catalysts that should yield profitable growth for years to come. First, the North American shale revolution is providing a competitive advantage as it's providing the key natural gas feedstocks these companies need at a big discount to world gas prices. Now, on top of that, the IRS is allowing these companies to have a special tax advantage to more easily raise investor capital in order to take advantage of the natural gas boom. That's a good formula for making profits.

The IRS is helping these companies, too
The IRS wants America to become more energy independent. Because of that its offering a handful of companies access to the MLP "loophole." It's a loophole that could yield a tremendous profits for you. To learn more about this strategy, and the energy companies taking advantage of it, you need to check out our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers