Portfolio Addition – LyondellBasell Industries
LyondellBasell Industries N.V. (NYSE: LYB – $82.97) is a global chemicals company that engages in the conversion of large volumes of liquids and gaseous hydrocarbon feedstocks into plastic resins and other chemicals. It operates in five business reporting segments: Refining (24% of 2014 sales); Olefins and Polyolefins- Americas (21%); Olefins and Polyolefins – Europe, Asia and International (33%); Intermediates and Derivatives (22%); and Technology (1%). In 2014, 52% of revenues were from North America, 19% from Europe and 29% from the rest of the world. The company’s refining segment produces gasoline, jet fuel, heating oil, ultra-low sulfur diesel fuel, lube oils, coke and sulfur from heavy, high-sulfur crude oil at refineries located on the Gulf Coast of the U.S. LyondellBasells’ two Olefins and Polyolefins businesses are the world’s largest producers of polypropylene and related compounds and a top worldwide producer of polyethylene, ethylene and propylene. Products from O&P find their way into the food packaging, container, automotive and consumer disposable industries, to name a few. The Intermediates and Derivatives segment is a leading global producer and marketer of propylene oxide and its derivatives including propylene glycol, propylene glycol ethers and butanediol used in the home furnishing, insulation, electronics and automotive industries. LyondellBasell’s Technology business develops and licenses polyolefin and other process technologies and provides associated engineering and other services. It also develops, manufactures and sells polyolefin catalysts to manufacturers. The company’s origins date back to 1953. The Lyondell Chemical Co. was spun off from Atlantic Richfield (ARCO) in 1989 and merged with Basell, originally a joint venture of Royal Dutch Shell and BASF, in 2000. Although the company is domiciled for tax purposes in The Netherlands, LYB has a major presence in Houston and has operations at 55 manufacturing sites in 18 countries. In 2009, the company entered into Chapter 11 bankruptcy protection and emerged a stronger organization the following year with a significantly de-levered balance sheet, an improved cost structure and a new leadership team.
Compared to last year, LyondellBasell’s operating margin has widened considerably by about 400 basis points. For the first six months of 2015, sales tallied $17.3 billion, versus $23.3 billion in the year-ago time frame. Net income, however, rose to $2.5 billion, compared to $2.1 billion. This was due to lower natural gas and liquid natural gas feedstock costs and enhanced manufacturing efficiencies at many of LYB’s plants. Sales were down due to decreased unit volume and currency translation negatives as a result of the strong dollar. Over the long-term, I believe results should benefit from increasing global demand for petrochemicals and a more favorable raw material cost position in the company’s Americas unit, stemming from a projected increase in U.S. natural gas supply. LYB’s capital expenditure program and operational improvements will also help to drive earnings growth as it invests in high return projects.
The company’s has strong cash flow and a solid balance sheet. As of June, LYB had $3.3 billion in cash on its books and long-term debt of $7.7 billion is manageable. In the first six months of 2015, the company was able to provide investors with a respectable 36.5% return on capital, well above the industry average. Adjusted per share earnings for the first half of the year were $5.34 compared to $3.25 in 2014. For the full year, Street estimates are $10.26 per share on revenue of $35 billion vs. $8.50 for 2014 on sales of $45.6 billion. Even if results come in on the low-end of estimates to $10.00, with the potential of slower worldwide growth in many of its markets, the PE is still a reasonable 8.3 times. The company pays a $3.12 annual dividend, which has doubled over the past three years and yields investors nearly 4% at current levels. The shares are not without risk. Regional, national or global economic conditions, raw material and energy costs, a strong dollar and product prices all factor in to possible negatives for those willing to accept some or all of these threats. Still, the stock’s long-term capital gains potential has become more attractive at recent prices as I believe demand will improve. And the well-funded dividend is a nice plus.
In the interest of full disclosure, I maintain a position in LyondellBasell.