Image source: Ray Luck/flickr.

Dow Chemical (NYSE:DOW) has outlined ambitious plans to take advantage of American natural gas and crude oil, which typically sport hefty cost advantages compared to petrochemical feedstocks elsewhere in the world. Simply put, cheaper inputs provide wider margins for value-added products, especially when selling into regions with more expensive petroleum and natural gas. But once the global price of crude oil began falling late last year, Wall Street began worrying that the company's advantages were fading away and whacked over $10 billion off its market cap. Losing cost advantages on massive production volumes would have jeopardized billions in earnings growth and cash flow and diluted management's efforts to return value to shareholders. "Would have" is the key phrase.

Despite doubts from analysts, Dow Chemical cruised to a record finish -- by several metrics -- in 2014. CEO Andrew Liveris also sought to quell any concerns over the company's competitive position by confidently stating, "We believe lower oil prices are a relative positive for Dow and a boost for the global economy." Here's what you need to know from the company's fourth-quarter and full-year 2014 earnings.

2014: A year of record performance
Investors are waiting to reap the benefits of Liveris' plans to boost operating efficiency by stripping unnecessary costs, lifting earnings power, and focusing on higher-value chemical production. Successful execution would allow Dow Chemical to maximize value creation for shareholders. It's surprising to think that a company offering a dividend yield near 3.8% (and growing), trading at a relatively low P/E under 15, and investing in shiny new facilities for future growth doesn't already offer a good deal of value to investors, but, as fourth-quarter earnings demonstrate, there is room for improvement.

 Financial Metric

Fourth-quarter 2014

Fourth-quarter 2013

% Difference

Adjusted EPS




Adjusted EBITDA

$2.4 billion*

$2.08 billion


Cash from Operations

$2.8 billion

$2.3 billion


*Indicates fourth-quarter record. Source: Dow Chemical press release and presentation.

It gets even better when investors consider the full-year performance.

 Financial Metric

Full-year 2014

Full-year 2013

% Difference

Adjusted EPS




Adjusted EBITDA

$9.3 billion*

$8.3 billion


Cash from Operations

$6.5 billion*

$6.2 billion


*Indicates full-year record. Source: Dow Chemical press release and presentation.

The company also increased its dividend to $0.42 per share (an all-time high), completed a $4.5 billion share repurchase program (and announced a new $5 billion program), and increased the value range of low-margin assets it plans to sell to $7 billion-$8.5 billion (after closing roughly $2 billion in divestments in 2014). By most accounts, Dow Chemical is on the right path, but investors need to know what is driving performance gains.

Shining stars in 2014
All five operating segments -- agricultural sciences, consumer solutions, infrastructure solutions, performance materials and chemicals, and performance plastics -- grew adjusted EBITDA in 2014 from 2013 on higher production and sales volumes. When you're as large as Dow Chemical, volumes and selling prices are a good gauge of performance. But "metric tons of stuff" means little to investors, which makes it easier to focus on the basic financial metrics.

That being said, performance plastics added $460 million, or 47%, of the company's total adjusted EBITDA growth for the year, thanks in part to lower oil prices at the end of 2014. Since petroleum or natural gas are often the primary inputs for production of these higher value products, lower oil and natural prices tend to boost margins. Similarly, using cheaper petroleum and natural gas from one region, such as the United States, gives Dow Chemical an advantage when selling value-added products into international markets with more expensive petroleum and natural gas. The segment includes petrochemical products such as packaging materials, shoe soles, automobile parts, and high-power voltage cables for electricity transmission lines, which are seeing strong demand in key geographies as the world's middle class swells.

Image source: Dow Chemical earnings presentation.

Although agricultural sciences only represented 13% of total revenue in the final quarter of 2014, it might have the brightest growth potential of any operating segment. Both divisions -- crop protection and seeds and traits -- notched record quarterly sales, while strong demand pushed quarterly EBITDA 40% higher from the year-ago period.

The momentum for agricultural sciences occurred without the company's Enlist portfolio, which is gearing up for commercial launch this year after being approved by multiple regulatory agencies in the United States and Canada. Enlist corn and soybeans will be the first crops capable of tolerating more than one herbicide, in this case glyphosate (Roundup) and 2,4-D (the most widely used herbicide in the world). Dow Chemical reported demand is strong, as farmers are hoping the new tool will help fight, and maybe alleviate, the growing problem of superweeds plaguing their fields. Investors will soon find out.

What's ahead in 2015?
In addition to rolling out Enlist this year, Dow Chemical will start operations at its megagrowth petrochemical complex in the Sadara joint venture, a polyethylene facility in Texas, and an ethylene facility in Louisiana. When coupled with productivity gains from existing portfolios, the growth projects are expected to easily boost the company's annual EBITDA to over $10 billion. That might not sound so ambitious after reaching $9.3 billion in 2014, but several years ago many questioned whether that goal was attainable. Today, it sounds like an underestimate.

The year ahead won't be all smooth sailing, especially with headwinds capable of whipping up any number of unexpected events. The company forecasts costs to increase compared from 2014 as growth projects come online and for global currency markets to weigh on EBITDA, thanks mostly to a stronger dollar. What's important for investors to remember is that Dow Chemical is executing on its long-term vision to maximize value returned to shareholders on its way to cementing its position as a chemical manufacturing powerhouse. As the most recent results show, it didn't deserve to lose over $10 billion of its market valuation.