On Jul 8, we initiated coverage on LyondellBasell Industries NV (LYB). While the Netherlands-based chemical giant is expected to gain from its expansion projects, it is exposed to volatility in raw material and energy costs and a still challenging European market.
LyondellBasell, a Zacks Rank #3 (Hold) stock, saw higher revenues and profit in first-quarter 2014, reported on Apr 29, on gains across most of its businesses. The improvement came despite headwinds from weather-related raw material cost volatility and shipping delays. However, both sales and adjusted earnings missed Zacks Consensus Estimates.
LyondellBasell, which emerged from Chapter 11 bankruptcy in 2010, is among the leading plastics, chemical and refining companies globally. The company continues to benefit from favorable North American natural gas environment and is executing its expansion projects to leverage the U.S. natural gas liquids (NGLs) advantage.
LyondellBasell remains on track with its ethylene expansion projects. The company’s multi-plant ethylene expansion program, which started last year, represents a total investment of roughly $1.3 billion across its Channelview, La Porte and Corpus Christi facilities which benefit from shale gas production. The expansion program, when in full swing, is expected to expand annual ethylene capacity by an estimated 1.85 billion pounds for an aggregate projected capacity of 11.8 billion pounds in North America.
LyondellBasell’s methanol facility at Channelview (restarted in fourth-quarter 2013) along with its other expansion projects are expected to bring in new capacity at considerably lower cost than building new facilities.
LyondellBasell also remains committed to deliver greater value to its shareholders leveraging healthy cash flows. The company, in Apr 2014, announced a 17% rise in its interim dividend to 70 cents per share.
However, LyondellBasell faces volatility in raw material and energy costs that account for a major portion of its operating costs. It saw elevated costs of natural gas feedstock in the first quarter. Higher natural gas and NGL costs led to an increase in ethylene production costs in the quarter.
LyondellBasell is also exposed to macroeconomic uncertainties and volatility across end-use markets it serves. The company derives a major chunk of its sales and earnings from the European market which is not out of the woods. The slow recovery in Europe may affect its business in the region.
LyondellBasell’s businesses are also affected by cyclicality of chemical and refinery industries. Moreover, downtime associated with maintenance turnaround at its La Porte facility is expected to have some impact on ethylene production in the second quarter. The company also faces significant price pressure as it operates in highly competitive markets.
Other Stocks to Consider
Other companies in the chemical space worth considering include KMG Chemicals Inc. (KMG), Celanese Corporation (CE) and Ashland Inc. (ASH). While KMG Chemicals holds a Zacks Rank #1 (Strong Buy), both Celanese and Ashland sport a Zacks Rank #2 (Buy).