NewMarket's Strategic Pivot: AMPAC-Driven Growth and Long-Term Value in a Transitioning Energy and Defense Landscape

The energy and defense industries are undergoing a seismic shift. As traditional petroleum-based markets face headwinds from inflation, trade tensions, and shifting consumer behavior, companies must pivot to sustain growth. NewMarket Corporation (NYSE: NEU) has taken a bold step in this direction, betting heavily on its subsidiary American Pacific Corporation (AMPAC) to drive long-term value creation. By redirecting capital and strategic focus toward AMPAC's mission-critical aerospace and defense applications, NewMarket is positioning itself to outperform in a landscape where traditional additives demand is waning.

The Decline of the Petroleum Additives Segment

NewMarket's petroleum additives segment, once a cornerstone of its business, has shown signs of strain. For the first half of 2025, sales in this segment totaled $1.3 billion, nearly flat compared to 2024, but operating profit dipped to $281.9 million from $298.7 million. The decline stems from a 4.9% year-over-year drop in shipments, driven by reduced lubricant and fuel additives demand amid inflationary pressures and global trade uncertainties. While the company has optimized costs and inventory, the segment's growth potential appears capped in a world increasingly prioritizing decarbonization and alternative energy solutions.

AMPAC: A Strategic National Asset in Mission-Critical Growth

In stark contrast, the acquisition of AMPAC in January 2024 has become a catalyst for NewMarket's transformation. AMPAC, a leading U.S. manufacturer of ammonium perchlorate—a key ingredient in solid rocket motors—has seen its sales in the Specialty Materials segment surge to $95.8 million in the first half of 2025, up from $55.1 million in 2024. Operating profit soared to $33.7 million, a dramatic improvement from breakeven in the prior year. This growth reflects AMPAC's critical role in supporting U.S. military modernization, hypersonic weapon development, and the commercial space boom, with companies like SpaceX and NASA driving demand for rocket motor components.

AMPAC's recent $100 million capital investment to expand ammonium perchlorate production by over 50% by 2026 underscores NewMarket's confidence in this sector. The expansion, approved by AMPAC's board in April 2025, will address surging demand from both domestic and allied defense programs and space launch initiatives. With no other U.S. competitor in this niche, AMPAC's dominance ensures it remains a strategic national asset, a label NewMarket's CEO has emphasized as central to its long-term vision.

Leveraging Strong Cash Flow and a Robust Balance Sheet

NewMarket's ability to fund AMPAC's aggressive expansion while returning capital to shareholders is a testament to its disciplined financial management. The company reduced net debt by $122.2 million in the first half of 2025, bringing its Net Debt/EBITDA ratio to 1.0, a level that provides ample flexibility for strategic investments. Meanwhile, NewMarket returned $77.2 million to shareholders via buybacks and $51.9 million in dividends, a move that balances growth with immediate value.

The company's cash flow generation—bolstered by both the resilient AMPAC segment and cost discipline in the petroleum additives business—enables this dual strategy. For Q2 2025, AMPAC's operating profit of $10.5 million (up from $5.0 million in 2024) highlights its contribution to NewMarket's liquidity. This cash flow is critical for funding the AMPAC expansion, which is expected to yield long-term returns as defense and space spending accelerates.

Positioning for Outperformance in a Transitioning Landscape

NewMarket's pivot to AMPAC aligns with two macroeconomic tailwinds: the U.S. military's $1.7 trillion modernization budget and the commercial space industry's projected $1.5 trillion market by 2030. By securing a monopoly on ammonium perchlorate production in the U.S., AMPAC is uniquely positioned to benefit from these trends. Unlike peers in the petroleum additives sector, which face commoditization and margin compression, AMPAC operates in a high-margin, high-barrier niche with long-term contracts and government partnerships.

Investment Implications

For investors, NewMarket's strategic shift presents a compelling case. The company is leveraging its strong balance sheet to reinvent itself, shifting from a cyclical energy play to a critical supplier in defense and aerospace—sectors with structural growth. While the petroleum additives segment may remain a drag on short-term earnings, AMPAC's expansion and NewMarket's capital allocation discipline position it to outperform in the long term.

The key risks lie in execution: delays in AMPAC's production expansion or underperformance in securing government contracts could temper growth. However, given the geopolitical urgency around supply chain security and the technical complexity of ammonium perchlorate production, these risks appear manageable.

Conclusion

NewMarket's strategic pivot to AMPAC-driven growth is a masterclass in navigating industry transitions. By redirecting capital to high-conviction, mission-critical sectors and maintaining financial flexibility, the company is not only weathering the decline in traditional additives but also building a moat around its future. For investors seeking exposure to defense and aerospace innovation, NewMarket offers a rare combination of strategic agility, financial strength, and long-term visibility. As the world shifts toward energy and security priorities, NewMarket's bet on AMPAC could prove to be its most enduring legacy.