Alexandra Engler
Hi, I’m Alexandra Engler, and I’m the founder of Aren Capital. Before we begin, please note this presentation is for informational purposes only and may include forward-looking statements based on current expectations and projections, which are inherently subject to risks, uncertainties, and assumptions. Aren is a fundamental investment firm focused on idiosyncratic and industrial secular disruptions, short and long, across the capital structure.
Idiosyncratic dislocations are situations where securities experience severe, sudden sell-offs due to things such as financial distress, litigation, or unexpected earnings shortfalls. Secular disruptions are characterized by industries on the precipice of enormous change, where the winners and losers in 3 to 5 years will be very different from those historically. We believe these dislocations are inherently connected, as idiosyncratic dislocations can cause secular disruptions and vice versa.
1. Celanese's Hidden Acetyls Tailwind
This chart is a great example of an idiosyncratic dislocation we dive into. The equity is off 63% since September 2024. This is Celanese, a large global chemical company. Earnings have continually underperformed expectations following a transformative acquisition at the end of 2022, and the equity reacted quite negatively following a guidance cut and dividend cut after the third quarter.
Negative results for the fourth quarter led the stock down further. We’ve liked this name since mid-April. While it is up 30% since then, we don’t believe our thesis is in the stock price currently, and there is still meaningful upside. Investors have rightly focused on the negative stream of earnings revisions coming from Celanese over the past year.
The transformative acquisition within its Engineered Materials segment was supposed to result in a segment of about $2 billion post-synergies. That segment is instead running at about $1.3 billion in EBITDA, so clearly something has gone wrong. Investors are also rightly focused on Celanese’s levered balance sheet, which was used to fund the acquisition.
However, we think negative news flow is close to an end, and the focus on Engineered Materials has obscured real positives coming down the pike for the Acetyls business. Most notably, we believe the Acetyls business, which is their other large segment, is in for a structural rise in profits due to higher prices for its key commodity input, methanol. We don’t believe many are yet paying attention to these trends, and we think this will drive earnings meaningfully higher over the next few years.
Celanese is an $18 billion enterprise-value global chemicals and special materials company that is number 1 or number 2 in most of its markets. The Acetyls business is about half the company and is the largest worldwide producer of acetic acid. Importantly, it is the most vertically integrated, both on its input costs and on its downstream uses, which provides significant advantages.
Engineered Materials, which makes up the other half of the business, produces specialty polymers that are often specced into their end platforms. This business sells about half of its output to autos and the other half to industrial and electronics end markets. While this company is levered, it still has a $5.5 billion market cap, generates $2 billion in EBITDA, and generates $800 million in levered free cash flow even while earnings are under pressure.
Summarizing our investment thesis, Celanese is the low-cost producer of acetic acid worldwide, and we believe pricing in acetic acid is poised to inflect higher over the coming years. We believe the earnings decline in Engineered Materials is largely at an end and that the company has strong cash-generation capabilities and additional value levers, giving it lots of runway. We see asymmetric upside given our entry valuation, and we think we are creating the company at 27% levered free cash flow today.
2. The Acetyls Cost Advantage
Going deeper, let’s walk through the acetic acid business. Celanese sits to the far left of the global acetic acid cost curve. Its plants are the ones in the dark green bars here, due to access to cheap natural gas, vertical integration with its own methanol production, and proprietary technology.
While the global acetic acid industry is more dispersed, the U.S. industry is quite concentrated. Celanese controls 63% of U.S. production capacity, and the top 3 producers control 90% of U.S. production capacity. Here on the left, you can see that Celanese produces 44% of the methanol used in acetic acid production and is the most vertically integrated large Western producer.
On the right, you can see that this provides almost a 50% cost advantage compared to others that are purchasing methanol or Chinese acetic acid producers. Given this cost structure, methanol prices are a substantial input cost into acetic acid prices and the variable with the most volatility. If you go back to your Commodities 101 days, variable input costs of commodities determine marginal costs, which set commodity prices.
3. Methanol Supply Is Tightening
So what has been happening with our input costs? Here you can see that methanol prices have been spiking over the last year and a half. Why is that? It’s because there have been a number of supply outages worldwide. While some of these are temporary, such as plant outages in the U.S. and Norway, a lot of these are structural, such as Iranian plants being offline during the winter so natural gas use can be prioritized for residential heating.
We believe many of these structural elements will continue, taking away 5% to 6% of worldwide capacity into the future. In addition, methanol is one of the few chemicals today where demand is poised to outstrip supply. The world outside of the Americas is short methanol, and this deficit will increase 35% to over 12 million metric tons over the coming 3 years.
All of this leads to a larger pull on production from the Americas to fill the demand in the rest of the world. We forecast the Americas’ utilization rates to rise dramatically to 95% by 2028. What we generally see in other industries where demand outpaces supply is substantially higher price volatility, with meaningful upside to prices, just as we’re seeing in methanol posted prices today.
Higher utilization leads to higher prices, and we forecast increases in methanol prices over the coming years. As you can see in the purple line, our models correlate well with historical regional methanol prices, using the appropriate commodity price inputs, utilization, and relationships between regions. These models then drive our forecasted methanol prices.
While methanol prices might decrease over the next few months due to operational issues being resolved, we believe strongly that there is a sustained increase in methanol prices due to the supply-demand mismatch over the coming few years. Now that we’ve walked through their input costs, what has happened to acetic acid output prices?
4. Acetic Acid Prices Are Turning
Historically, changes in methanol prices translate through into acetic acid prices, which drive Celanese’s profits. However, we haven’t seen that this past year, as you can see by the flat green line on this chart. Why? It’s because we’ve seen increases in acetic acid capacity.
Specifically, Celanese expanded its low-cost Clear Lake facility in the U.S., and Chinese capacity has driven utilization lower in China. In the U.S., this increase in capacity is now behind us. Changes in methanol pricing generally do a very good job of explaining changes in acetic acid prices, outside of this last year when we saw a large increase in capacity. We expect these changes to continue to correlate as capacity stabilizes.
Let’s simplify this into supply-and-demand charts. Here is a stylized version of the acetic acid supply curve, where demand intersects to determine price. Higher methanol costs raise the acetic acid cost curve and should raise acetic acid prices, keeping demand constant. You can see that in the green line.
However, this increase in methanol prices came at the same time as increases in capacity. In the U.S., this was low-cost capacity, which drove acetic acid prices back down. You can see the move from the green line to the gray line. On a go-forward basis, we believe increasing methanol prices will now translate into higher acetic acid prices in the U.S.
As we are past capacity additions, we undertake a similar exercise to the one we did with methanol prices to forecast forward acetic acid prices. As capacity utilization stabilizes, those higher methanol prices translate into higher acetic acid prices. We forecast U.S. acetic acid prices to increase 30% by 2028 from current levels.
All of this drives higher Acetyls EBITDA over the next few years, increasing 50% by 2028 from 2024 levels. This drives our difference from consensus. Now turning to Celanese’s other division, Engineered Materials, the segment that has underperformed following its acquisitions, this segment unfortunately is more of a black box.
We’ve broken out what we think is Celanese’s segment revenue attributable to autos and revenue per car produced by geographic area. It seems to have bottomed over the last few quarters. The company also acknowledged that it has lost meaningful profitability in its Nylon 66 business.
Analyzing the financials of a bankrupt competitor in the nylon business, Ascend, we believe there are little earnings left to lose from this part of the business. On a go-forward basis, we believe EBITDA is troughing this year and has 50% growth prospects driven by the Acetyls business over the next 3 years.
We are well above consensus in the outer years, showing EBITDA that is 25% above 2028 Street numbers. We also believe the levered free cash flow profile is quite attractive, as we’re investing in a company we believe can generate cash flow yields north of 20% starting in 2027.
We think there are additional upside levers through monetizing JVs and equity interests, as the company is doing currently, as well as through higher demand in the U.S. if domestic manufacturing increases. I’d note that another way we are likely to play the secular theme of higher methanol prices is through Methanex, the world’s largest producer of methanol.
5. Celanese Is Worth $79
In summary, we believe it is worth $79 a share, or over 50% higher than current trading levels. The company has significant cash generation. We believe earnings in Engineered Materials have troughed, and most importantly, we see significant tailwinds in the Acetyl business.
Celanese is a great example of what we do at REN: investigate dislocations, distill complicated situations into their few key drivers, and find anomalies and data points that lead us to forecast industrywide changes. Thank you for your time.