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Morningstar | Raising Celanese FVE to $102 As Management Aims to Reduce Long-Term Costs; Shares Fairly Valued

2018 was a strong year for Celanese, as operating EBITDA grew 31% year on year. However, the company's growth was somewhat hampered by falling oil prices during the fourth quarter, which led to lower pricing and lower profit margins in the acetyl chain segment during the quarter and a lower 2019 profit outlook. On its own, we would reduce our fair value estimate for Celanese to account for a lower near-term acetyl chain outlook.

However, Celanese also announced a plan to increase its low-cost acetic acid production capacity by 50% at its Clear Lake, Texas, plant while closing higher-cost capacity in China and Singapore. The moves, which management expects to be completed by 2021, will reduce the company's cost base by shifting more production to low-cost U.S. natural gas-based feedstock. Having incorporated these changes into our valuation model, we are raising our fair value estimate to $102 per share from $100 as our improved long-term outlook more than offsets our lower near-term outlook. Our narrow moat rating based on the company's cost-advantaged acetic acid production is unchanged.

The Brent oil/U.S. natural gas spread is one of the most important drivers of profitability for Celanese's acetyl chain segment, which generates roughly half of total profits. Most of the company's production comes from U.S. natural gas feedstock, while marginal cost producers use oil-based products. As oil prices fell from over $80 per barrel at the beginning of the fourth quarter of 2018 to the mid-$50s by the end of the year, Celanese's acetyl chain operating EBITDA margins compressed 410 basis points sequentially to 26.8%.

In the engineered materials segment, operating EBITDA grew 5% year on year driven by a 3% increase in sales to the auto industry, which outpaced auto builds. This is consistent with our long-term outlook that Celanese will benefit from auto lightweighting trends that will allow the company to increase its volume sold per vehicle.