Eastman’s Propane Hedge Proves to Be Headwind

OREANDA-NEWS. February 02, 2015. Eastman Chemical's hedge on propane prices last year will limit its ability to take advantage of recent declines in the feedstock at its Longview, Texas cracker, executives said this morning.

"Our hedging strategy that we had taken to reduce volatility in our propane and other input costs have become a significant headwind given the unprecedented recent drop in the price of propane," said chief financial officer Curt Espeland. As a result, Eastman lowered its 2015 guidance between 40-60? per share.

During the third quarter of 2014, Eastman hedged propane at just over 100?/USG through 2015, the company previously said. Spot propane in Mont Belvieu, Texas averaged 69.58?/USG during the fourth quarter of 2014 and 47.66?/USG in January.

"Indications at the time pointed to higher propane costs as the impact of PDH units and export terminals were supposed to result in US propane prices increasing to be more in line with global prices," Espeland said. However, the ongoing production glut from shale plays, coupled with a global downturn in energy prices, led to plummeting spot propane prices during the fourth quarter.

Eastman will continue to crack propane at its 701mn/lb/yr cracker in Longview, Texas and will purchase any additional feedstock on a spot basis, executives said.

"We don't expect the hedge to be a headwind in 2016, unless you think oil will drop further from here," Espeland said.