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Morningstar | Celanese Reports Another Strong Quarter; We Raise Our FVE to $98 on Higher Near-Term Outlook. See Updated Analyst Note from 20 Jul 2018

Celanese reported solid second-quarter results as higher volumes and prices in the engineered materials and acetyl chain businesses drove a 62% growth in adjusted earnings per share year on year to $2.90. We're raising our fair value estimate to $98 per share from $93 to account for elevated profit margins in the acetyl intermediates business over the next couple of years and the time value of money. Our narrow-moat rating based on Celanese's cost-advantaged acetic acid production remains intact.

In the acetyl intermediates segment, operating EBITDA more than doubled to $278 million during the second quarter and EBITDA margins expanded 1,200 basis points from 20.3%to 32.3%. The increased profitability was driven by an 8% volume growth, which led to greater capacity utilization, and a 20% increase in prices as the company benefited from a higher spread between crude oil and natural gas prices. Because Celanese produces the majority of its acetyl acid and vinyl acetate monomer from natural gas-based inputs, while marginal cost producers typically use oil-based inputs, the company can grow profits when the spread between crude oil and natural gas rises.

Over the next couple of years, we expect acetyl intermediate EBITDA margins to remain in the high-20% to low-30% range, which is well above the 17.5% average over the last five years from 2013 to 2017. As a result, Celanese should benefit from a higher spread between Brent oil and U.S. natural gas as well as lower acetic acid production in China. This should support higher prices and keep Celanese's volumes and capacity utilization higher than in a midcycle environment. Through 2020, we forecast Brent oil to remain around $70 per barrel, while U.S. natural gas prices remain at or below $3 per MMBtu.

However, over the long term, we see a reversal of both trends. We forecast Brent oil prices to fall to $60 per barrel while U.S. natural gas prices remain around $3 per MMBtu, which should lead to lower prices in Celanese's acetyl intermediates segment. We also see supply in China coming back online, which should further weigh on prices. At the current share price around $112.50, we think the market continues to forecast acetic acid prices will remain high in the long term.

For more information on our oil price forecast, please see our June 26 report, "Oil Prices Are Unsustainably High, Stretching Energy Valuations."