At the end of 3Q16, Huntsman’s (HUN) debt stood at $4.6 billion. In 2016, Huntsman’s debt was on a declining trend. At the beginning of 2016, Huntsman had a debt of ~$4.8 billion, and by the end of 3Q16, Huntsman had reduced its debt to $4.55 billion.
As mentioned in the previous part of this series, Huntsman intends to make early debt payments from the sale proceeds of the European Surfactants business to Innospec (IOSP). Huntsman is expected to reduce its debt by ~$260 million, leaving the total debt at $4.3 billion.
Debt to equity
The debt-to-equity ratio is influenced by factors like additional borrowings, repayment of debt, repurchase of shares, issuance of additional equity, and changes in retained earnings. With debt declining and equity growing strong, Huntsman’s debt-to-equity ratio also fell from 2.9x in 1Q16 to 2.60x at the end of 3Q16. With Huntsman’s early repayment of debt and assuming the equity remained same, the debt-to-equity ratio could improve to 2.40x.
Strong cash flow helped to reduce leverage
The major reason for Huntsman’s reduction in debt in the first nine months of 2016 was high cash flows. Huntsman has reduced almost $300 million in debt during this period. At the end of 3Q16, Huntsman had generated $848 million as cash flow from operations as compared to just $387 million a year ago, which implies an increase in cash flow from operations by 119% on a year-over-year basis. In spite of repaying debts through cash, Huntsman maintained a healthy cash balance. At the end of 3Q16, Huntsman’s cash and cash equivalent stood at $343 million. If the high cash flow from operations continues, Huntsman’s investors will be confident that the company will continue to reduce debt.
Investors can invest in the First Trust Materials AlphaDEX Fund (FXZ) for indirect exposure to Huntsman. The fund has invested ~2.2% of its portfolio in Huntsman. The top holdings of the fund include Dow Chemical (DOW) and Mosaic Company (MOS), which have weights of 3.5% and 3.8%, respectively, as of December 30, 2016.
In the next part, we’ll analyze Huntsman’s interest coverage ratio.