LyondellBasell Industries (LYB) reported first quarter earnings on April 22. Adjusted earnings per share of $2.30 were above consensus expectations of $2.27. The outperformance was due to stronger than expected chemical results, lower corporate expenses, and a lower than usual tax rate.
Key sources of strength in the quarter were high European petrochemical operating rates and solid polypropylene values in the U.S. Polypropylene operating rates in both Europe and the U.S. were above 90%, which indicates a fairly tight global petrochemical supply/demand situation.
In the Olefins and Polyolefins - Americas division, ethylene margins declined by about $0.14 per pound but this was offset by strong polypropylene spreads that increased by approximately $0.13 per pound.
In the Olefins and Polyolefins - Europe, Asia, International division, Olefin margins improved by $0.08 per pound and polyethylene and polypropylene spreads improved by $0.08 and $0.07 per pound, respectively. This happened despite the fact that oil prices were higher the year before. Oil and ethylene prices tend to move together so this was strong performance.
Capex was $527 million in the quarter. The company paid $336 million in dividends and issued ?750 million in bonds. Cash at the end of the quarter was $3 billion.
LYB repurchased 12.3 million shares in the quarter at a cost of approximately $1 billion.
On May 13, LYB announced an increase in the second quarter dividend to $0.85, a 9% hike from the first quarter. It also announced a new share repurchase program that authorizes the repurchase of up to 10% of the company’s outstanding shares over the next 18 months. The company has purchased over 25% of its shares and has returned more than $21.6 billion to shareholders through dividend payments and share repurchases over the past five years.
Ethylene and polyethylene markets continue to be balanced and may tighten as we go through heavy maintenance seasons in the U.S. and Asia. With global operating rates above 90%, LYB will benefit from higher pricing power. LYB is the largest polypropylene producer in the world so it stands to gain from improving margins in the sector.
There is an increase in ethylene capacity coming up in 2017 and 2018 but in the near term LYB is well positioned to benefit from tight ethylene markets globally. And LYB will continue to benefit from its advantaged position in the U.S. where it sources cheap natural gas as a feedstock. Most of its competitors elsewhere in the world are forced to use higher cost naphtha; around two-thirds of the global supply of ethylene is made from naphtha.
The selling prices for LYB’s products are correlated with oil prices so it benefits from low input prices and higher selling prices. Thus, in an environment where oil prices are rising, LYB will see expanded margins as it will continue to enjoy low North American natural gas prices while its competitors will be forced to pay more for their oil-based raw materials.
Buy at market. LYB is positioned to operate profitably in this environment relative to its peers and investors can enjoy a solid dividend yield and ongoing share repurchases.
Michael Corcoran in Gordon Pape’s Internet Wealth Builder, www.buildingwealth.ca, 1-888-287- 8229, May 23, 2016
