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Coverage Initiation: LyondellBasell
Value Line has initiated coverage of LyondellBasell (LYB) in its flagship product, The Value Line Investment Survey. LyondellBasell is one of the world’s largest plastics, chemicals, and refining companies. The company manufactures ethylene, polyethylene, propylene, polypropylene, propylene oxide, and acetyls, and produces gasoline, diesel, and fuel additives. It has operations on five continents, including 18 manufacturing facilities in 58 countries, and has sales in more than 100 countries. The company’s corporate headquarters are in The Netherlands and its U.S. headquarters are in Houston. LyondellBasell has about 13,500 employees. Many of the company’s products are used in everyday goods such as tires, carpets, and plastics.
A predecessor company, Lyondell, was formed in 1985 from certain chemical and refining assets of Atlantic Richfield. Lyondell was spun off and became a publicly traded equity on the New York Stock Exchange under the symbol LYO in 1989. Basell was formed as a 50/50 joint venture between BASF and Shell (RDSA) in 2000. The two companies merged in 2007 to form LyondellBasell, but the newly formed company was subsequently hit hard by the slump in the worldwide economy. This culminated in a Chapter 11 bankruptcy filing in 2009. After reorganizing, LyondellBasell re-emerged as a public company in 2010 and started trading on the NYSE under the symbol LYB.
LyondellBasell has fared better in its second stint as a public company. It started paying dividends in 2011, was added to the Standard & Poor’s 500 index in 2012, and saw its debt upgraded to investment grade status by the credit rating agencies earlier this year. LyondellBasell also paid special dividends in 2011 and 2012.
There are a number of reasons for the company’s improvement. Of course, a major one is the recovering economy in much of the world, although Europe is an exception. LyondellBasell is also benefiting from the low price of natural gas (compared with the level from 2001 to 2008), which is a key feedstock for chemicals. And it has invested in assets, such as pipelines (which can distribute oil at a lower cost than railroads). Several other significant capital projects are in various stages of development. LyondellBasell has also cut costs; in fact, the employee headcount has been reduced by 20% since 2008. The stock has performed well since returning to the NYSE in 2010.
The company’s cash flow is healthy. In late May, LyondellBasell’s board of directors raised the quarterly dividend by 25%, to $0.50 a share, and stated that it expects to repurchase 10% of its outstanding shares over the next 12 months. The stock is suitable for income-oriented investors.
Among the risk factors that investors should be aware of, the most noteworthy are the state of the economy and exposure to commodity prices. Natural gas is important, but so are natural gas liquids such as ethane, propane, and butane. If commodity prices rise, LyondellBasell is not always able to pass these increases on to its customers. Foreign exchange rates are another source of uncertainty. Stricter environmental regulations might force the company to increase its capital spending on compliance. Even the weather can cause problems. LyondellBasell has had to shut plants on the Gulf Coast temporarily due to hurricanes. Investors should also note that, as of February 1, 2013, two separate groups of affiliated shareholders owned 34% of the outstanding shares.
For a more thorough look at LyondellBasell’s business prospects, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.