LyondellBasell ($LYB)
A re-rate to $80 requires nothing new to happen.
I bought into LYB in August of last year at an average price of $50.30, when it was completely unloved: https://lasse108.substack.com/p/lyondellbasell-lyb
That position is up 25% and the stock is no longer in the doldrums it was then, but I do think a re-rating to the March highs is likely. This article aims to explain where the company stands after a spectacular second quarter, what the bull case is, and why the market might have misread the benefit from the Hormuz closure.
What’s important
LYB cracks ethane on the US Gulf Coast. Its competitors in Europe and Asia crack naphtha, which is priced off crude oil. Every dollar increase in Brent widens the gap. In June, ethylene was around $513 a ton in the US against $1,064 in Germany and $2,104 in Japan.
The second quarter was amazing. Adjusted earnings came in at $4.30 per share against $3.41 expected, on EBITDA of $2.1b, more than triple the first quarter, at a 23% margin. Olefins and Polyolefins Americas alone did $1.3b, about four times what it did in the same quarter last year.
Management estimates about six million tons of Middle Eastern polyethylene capacity has been damaged and will not return before at least 2027. If you subtract that loss from the new capacity being added, the global addition to supply for 2026 is close to zero, much more manageable than the glut the industry was expecting, and making this the first year since 2021 that the market hasn’t become structurally worse.
The stock bottomed at $41.58 in November and ran to $84 in March. It currently trades at $62.65, marking a 41% gain year to date. The market has already shown it is willing to pay $80+ for a scenario of extended supply chain disruption. The dividend was cut in half in February, and the forward yield is now a fairly ordinary 4.4%.
The bull case
Middle Eastern petrochemical capacity has taken structural damage. Asian and European naphtha crackers are squeezed from both ends by higher feedstock costs and higher freight. American producers with better feedstock inherit the margin. LYB is the most levered listed name to that shift, with around 80% of its global ethylene capacity now on advantaged inputs after they moved out of Europe. This is framed not as a geopolitical trade but as a structural turn: the chemicals cycle bottomed in late 2025, and what follows is a multi-year recovery in a market that has stopped adding capacity faster than demand.
Even if shipping routes reopen, freight and war-risk insurance do not snap back immediately. Underwriting resets slowly, and the Red Sea is compromised as well. The cost curve probably does not return to its February shape even in a peace scenario, so some of what looks like war rent is more persistent than it appears.
Hormuz is not resolving
It is worth mentioning this, since the entire bear case rests on normalization, and normalization is not happening.
The strait has been effectively closed to routine commercial shipping since late February. A US–Iran memorandum reopened it briefly from mid-June, an agreement that collapsed in early July after attacks on commercial vessels. Traffic is running at a small fraction of the pre-crisis baseline. The Houthis declared a blockade on Saudi ports in late July, and Brent is firmly in the $80s.
Every week this persists is another week of Middle Eastern polyethylene not reaching Asia and Europe, another week of elevated freight and insurance embedding itself into contracts, and another week in which the six million tons of damaged capacity stays damaged. LYB’s own management said normalization will not be a straight line, and expects prices to stay above pre-conflict levels because global inventory buffers are thin. I should say that I have no edge in forecasting this, and neither does anyone else. But it is fairly apparent that the base case is not that this ends anytime soon.
What the windfall quarter
LYB generated $2.1b of EBITDA in the second quarter and $752m of operating cash flow. That is 36% conversion. The first quarter was worse and the half-year numbers stand at $2.7b of EBITDA against $483m of cash from operations, under 20% conversion.
The money did not vanish, it went into the balance sheet. Receivables grew by almost $1.4b in six months and inventory by about half a billion, against a much smaller increase in payables, totaling about $1.4b of working capital built in H1.
This is what happens when you get a price spike. You sell at higher prices, book the margin, and then wait to collect it while carrying more expensive inventory. Anyone who has watched Braskem this year will recognize the mechanic.
https://lasse108.substack.com/p/the-state-of-braskem
Two things to keep in mind. The first is that the windfall is a promise rather than a deposit. Cash actually fell during the half, from $3.4b to $2.6b, helped along by the $310m LYB paid to hand its European assets over.
The second is more useful: working capital reverses. As prices normalize, roughly $1.4b comes back out, and it comes back out precisely when reported earnings are falling. Over the next two to three quarters, profit and cash flow are going to move in opposite directions. A holder base anchored on headline EBITDA might misread both prints, creating opportunity.
The durability of the assets
The portfolio surgery is happening. They closed the Houston refinery, and four European sites went to AEQUITA in May. Brindisi closes by the end of the year and Maasvlakte is gone. Headcount is down by about 17% since the start of last year, and the remaining European footprint is the best part, mainly Wesseling, Botlek and Fos.
Let’s take a look at the cost of doing it. LYB took a $734m loss on sale, plus $310m of cash contributed to the buyer. LYB paid someone to take four European plants, which further highlights the diabolical state of the commodity olefins market in Europe. That is worth remembering whenever someone describes the disposals simply as improving the cost structure.
The underlying oversupply hasn’t been fixed either. US polyethylene contracts gave back 15 cents a pound in June, the first decline since May 2025, after adding 45 cents since the conflict began. Two million tons of new US capacity starts up in the second half of 2026, aimed squarely at export. Around four million tons is landing in Asia, and INEOS is starting Europe’s largest cracker in Antwerp in Q3. China has been decoupling from Middle Eastern feedstock using coal-to-olefins while drawing its own inventories down by about 30%.
The upside
In March of 2026 the market paid $84. At that point LYB’s most recent print was the fourth quarter of 2025, with EBITDA of $345m, the trough of the entire cycle. Not one quarter of windfall earnings had been reported, and the $2.1b print was four months away. That price was paid purely on the anticipation of a scenario that has since been confirmed. Despite this, the stock has fallen 25% from that level while the fundamental case has gotten stronger rather than weaker.
A re-rate back towards the high seventies or low eighties therefore needs no crazy assumptions. It just needs the market to pay what it already paid once, for a thesis it now has the numbers to support.
Getting back to peak cycle levels of $100+ requires more. LYB earned $9.3b of EBITDA in 2021 and $6.5b in 2022, so peak earnings power is not the constraint. That said, the company that earned $9.3b doesn’t exist anymore, that figure included the Houston refinery, the four European sites and a few others, and the 2022 number relied on excellent refining margins. But the cost programs have delivered and the remaining assets are better, so I think the company can get to $7b+ at the peak of the coming cycle.
The problem is the multiple. Commodity chemicals de-rate into strength, as the market pays up for trough earnings and pays down for peak earnings, since everyone knows the peak is temporary. LYB was never awarded a mid-cycle multiple on its 2021 record. Run it through and a repeat of 2022 gets you somewhere around $70. Getting to $100 needs something closer to a repeat of 2021, and 2021 was not an upcycle, it was post-pandemic stimulus colliding with broken supply chains and Winter Storm Uri taking Gulf Coast crackers offline. That simply can’t be the base case.
Closing thoughts
At $41 last November you were buying a great balance sheet, the lowest cost ethylene position in the world and a portfolio being actively cleaned up, all at a price that assumed a permanent downturn. At $62 you are buying a business that is far better than it was nine months ago, but at a higher price, and your return now depends on the cycle delivering rather than on it not getting worse. Price this as a fair price for a good business, not as the deep-value entry it was last autumn.
I am holding, and I think the odds favor the upside from here.
The reasoning is simple. The market was willing to pay $84 for this scenario on the 31st of March, before it had materialized. It has now materialized, with better earnings than anyone imagined. The strait isn’t open, and the damaged capacity has not come back. Yet the stock sits 25% below where it traded on the anticipation alone. Somewhere in there the market decided this was a one-quarter event and moved on, and I don’t think the evidence supports that assumption.
I currently hold a 4.5% position in LYB, roughly in line with my basic position size of 5%. My other chemicals exposure is BAK and SSL.
We liked it for the yield last August and because we didn’t feel anyone could build a petrochemical plant these days, even with an abundance of capital. The history is also interesting, APO made a bundle years ago and Mr. Len Blavatnik still holds. Unfortunately, we said adieu when the dividend was cut this year, who knew the fever run-up would happen with the war.