LyondellBasell Industries N.V. (NYSE: LYB – $89.10) 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. 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 2007. Although the company is domiciled for tax purposes in The Netherlands, with offices in London, LYB has a major presence in Houston and has operations at 55 manufacturing sites in 18 countries. The company operates in five business reporting segments:
- The refining segment (16% of 2016 sales) produces gasoline, jet fuel, heating oil, diesel fuel, lube oils, coke and sulfur from crude oil at refineries on the Gulf Coast of the U.S.
- The two Olefins and Polyolefins businesses (59%) 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 (24%) 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.
- The Technology business (1%) develops and licenses polyolefin and other process technologies; provides associated engineering and other services; and develops, manufactures and sells polyolefin catalysts to manufacturers.
In 2016, 48% of revenues were from the U.S, 19% from Europe and 33% from the rest of the world.
For the second quarter, sales were up 15%, to $8.4 billion and adjusted share net rose 15% to $2.82. Lyondell’s margins have improved markedly over the years. In 2011, LYB posted share net of $3.79 on over $51 billion in sales. In 2016, it posted share net of $9.13 on $29.2 billion in revenue. This is a significant margin enhancement and demonstrates how efficient the operating leverage has become. It should also be pointed out, however, that lower interest rates and share repurchases have helped. This year margins are apt to decline a bit due to ongoing maintenance charges and inventory write-downs.
Over the long-run, 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 has strong cash flow and a solid balance sheet. As of March, it had nearly $17 billion in cash on its books and long-term debt of $8.4 billion is manageable. Last year the company provided investors with a respectable 63.4% return on equity, well above the industry average. Adjusted earnings for the first half of the year were $5.08 compared to $4.75 in 2016. For the full year, Street estimates are $9.89 per share on revenue of $32 billion vs. $9.13 last year on sales of $29.2 billion, affording the shares a reasonable estimated price earnings ratio of 11. The company pays a recently hiked $3.60/share annual dividend yielding investors 4% at current levels. The shares are not for the risk averse. National or global economic conditions, raw material and energy costs and a strong dollar pose possible investment threats to LYB. But I believe longer-term the shares should do well for income investors willing to assume those risks. I am starting the position with a 9% allocation for the income portfolio.
In the interest of full disclosure, I hold in position in LyondellBasell in one of my managed accounts.