LyondellBasell ($LYB)
Buying into pain, gaining from normalization.
LyondellBasell is a top-3 global producer of polyethylene and polypropylene and one of the lowest-cost operators in North America thanks to ethane from shale-gas. At todays price of $49, the market is pricing a long time of depressed earnings, but the spreads and utilization tend to revert to the mean. we have a wide margin of safety, a great dividend (11%), and a few clear catalysts, LYB is all about buying into pain.
The revenue:
Roughly 40% of revenue comes from Olefins & Polyolefins (O&P) in the Americas, produced from cheap ethane, so costs are great.
25% from O&P in Europe and Asia, which has higher costs but the advantage of being close to EU demand. (potential political catalyst as well)
20% is from Intermediates & Derivatives, most notably PO/TBA which have steady margins. The last 15% is from Advanced Polymer Solutions (APS).
The Setup:
Global PE oversupply has crushed margins: Northeast Asia PE-naphta spreads have been about half of the average, and while U.S. PE-ethane is stronger, it is still below normal ranges. LYB has run its polyolefins at roughly 80% utilization to preserve value. The economic edge hasn’t changed much. U.S. ethane keeps LYB in the first quartile of costs. As rationalization + demand recovery take place into 2026-27, spreads and utilization should revert to the mean.
The Case for LYB
Valuation: 4.5x trailing EV/EBITDA and 0.4x sales.
Cost advantages: 80% natural gas feedstock in Americas drive lower cash costs.
Resilience: the PO/TBA and APS provide steadier earnings than with just commodity exposure.
Capital returns: EU asset sale could free $1b for buybacks at a low price.
Scenarios
Bull ($117): Spreads rebound, 95% utilization, asset-sale buybacks. Return of +150% with dividends.
Base ($84): Spreads revery to mean, 90% utilization, some EU support + specialty mix. Return of +83% with dividends.
Bear ($39): Spreads stuck at current levels, below 85% utilization, no EU relief, high EU energy. Return of -10% if dividends aren’t cut.
Positioning: Accumulate at current levels, add on weakness if fundamentals (spreads/utilization) are unchanged. Begin trimming at $70-$80 if no new catalysts, hold for $80-$100 (and beyond) if spreads/utilization are normalizing.
LYB is on my watch list. One aspect i'm wondering about is the current global concern with microplastics, UN dialogue on a new treaty framework to restrict/monitor future plastic production and usage, and related negative sentiment on the plastic sector going forward. While there is an element of closing the barn door after the horse has bolted, the concern with plastic degradation and microplastic migration into foods and tissues is very real... and one that the plastic industry needs to meaningfully address.
Interesting play, thanks for this.
A pointer, if I may - as a reader, I always find it frustrating when valuations are presented in EV/EBITDA terms with no explanation of the size of capital costs. For many businesses, D&A eats up a great majority of EBITDA. It's useful as a comparative multiple, but on a standalone basis in a capital-intensive industry, it conveys very little information.