LYB - LyondellBasell

[silverhawk]

LYB is a chemical company that makes commodity plastics using oil and natural gas feedstock.  In 2014, the company had $46bn in revenue with $14bn in the US, $15bn in Europe, $12bn in refining and $10bn in intermediates and derivatives.  Top line will remain flat unless the company opens new plants or grows inorganically.  Because of fracking, the Americas went from 14% to 25% operating margins over 5 years.  Other segments have sub 10% operating margins.  Overall, the group produced $6bn in operating income in 2014.  Capex of $1.5bn and depreciation of $1bn so $3.5bn in FCF which the company is using to buy back stock - $6bn in 2014 and pay dividends - 3% yield.

 

So the company has $45bn market cap and $50bn enterprise value with $3bn in cash and $7bn in debt.  Trailing, it trades at 12x p/e and 7x ebitda.  The company has a large ownership stake by a Russian billionaire former oligarch who did an lbo that led to the company's bankruptcy a couple years back but came back to take another bite of the apple.  A bunch of PE firms coinvested with him but exited a year or two ago for a monster return.

 

The current multiple presents a decent entry price.  Unlike an exploration or production company, the company does not have to constantly drill new wells or find new mines to maintain production.  The capital structure is conservative and the company is committed to buybacks and paying a healthy dividend and remaining what it is - a bunch of plants that turn oil and natural gas into plastics and other products rather than trying to create new plastics.  The key question is how the profitability of the segments will shift with the price of oil.  Cheap trapped natural gas production gave the company a large cost advantage over its european and asian rivals.  The full impact of shifts in commodity prices have yet to be seen but the lowering of the price umbrella in america should be partially offset by its production in europe which have become more profitable.

 

This could just be a cylical at the top of the cycle and competition will get a lot worse when new refining plants open and the spread between natural gas and oil collapses.  Would love to hear your thoughts on my thoughts.

[ZenaidaMacroura]

I feel like cracking will be much less profitable in the future - there is so much ethylene capacity coming online by 2020.  My own company expects to double their capacity by 2018-19.  Still maybe there's a reason these expansions maintain such a torrid pace since everyone committing to a project now  can see that everyone else is moving in that direction too...

 

Had a small position after the re-ipo in the $26-29 cost basis range long since sold.

[nsa122]

I have been buying and curious if anyone else has looked. They have produced a lot of cash in recent years; I can't say how sustainable that will be.  I do find it refreshing though that they seem to have been rational with their stock buybacks--when the price goes up, they buy less; when the price goes down, they buy more, as in 4th quarter.  Steady buybacks funded by earnings at a <10 PE seems like a reasonable strategy though.  I can't claim any special insight into the industry but management has given me some confidence, famous last words I know.

[rukawa]

Seems a more attractive that Eastman Chemical which I feel is in a similar industry. Better dividend, less debt, similar profit margins, cheaper, better dividend and larger share buybacks. The management definitely appears quite share-holder friendly.

[Spekulatius]

Coincidental, I was just looking at this stock, as a competitor of DOW. both are fairly similar in size and profitability,  no surprise , since both produce the same product (PE, PP), except DOW  also has a business in siloxanes.

 

Size wise, both are fairly similar, but LYB has half the debt of DOW  ($9B vs $18B for DOW) EV/ EBITDA multiples are similar (~7x, but LYB looks a bit cheaper in terms of PE, due lower tax rates ~15% vs ~20-23%. I would give a small edge to LYB in terms of valuation.

 

LYB and DOW are pretty interesting as chemicals are very sensitive to changes in the economy. They tend to see a slowdown early,  but also bounce back quickly in a recovery. This is because small changes in the demand/supply balance will also cause changes in margins (as those business tend to be price taker ), which compounds often changes in earnings. BASF earnings warning (30% reduction in EBIT this year) really spooked the whole sector.

 

This is one of the sectors that provide an inside look into the economy per Druckenmiller’s paradigm, imo. Needless to say, this does not look great in the short or medium term.

[Spekulatius]

Bought some LYB on Friday. I might be a bit early, but it’s interesting they the stock has been more or less flat since 2014, as have been operating earnings. However, sharecount has 575M shares in 2013 to ~340M shares, while they have been paying a nice dividend. ROA has been north of 15% during this time. While margins and earnings could come under pressure in a slowdown, I believe it is likely that they would bounce back very quickly in a recovery.

 

I actually think that this is a business that would fit nicely into BRK. For one it is cheap and then in generates a lot of cash and can’t really get disrupted. BRK owns already Lubrizol (which has been a so so acquisition for them), so they might go with a special chemical company instead, but I think it’s quite likely that they strike out in this field.