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1. Investment thesis
LyondellBasell (NYSE:LYB) is a Dutch chemical company with operations in the Netherlands, the USA, Japan, Germany and many other important countries. The stock returned 16.9% p.a. (13.4% p.a. without dividends) by buying back 243 million shares (42.7%) and returning a lot of cash through dividends of more than $55 per share in 14 years.
With more than $40 billion in revenues and nearly $5 billion cash provided by operating activities in 2023, the company has ample opportunities to allocate cash for debt repayments, stock repurchases and dividends.
Can the company generate as much cash as it did before in the years to come and can investors expect similar returns of nearly 17% p.a. in the near future? For an assessment of LyondellBasell’s future cash generation and return potential, we will analyse current business trends and the stock’s current valuation.
2. Business trends
The first quarter of 2024 was a positive surprise for LYB after a soft fourth quarter 2023. The company showed a positive EBITDA in all segments as a result of improving market conditions.
The most important segment “olefins and polyolefins Americas” was impacted by lower volumes, but favourable prices and lower costs have improved margins.
The segment “olefins and polyolefins Europe, Asia and International” profited from Red Sea disruptions and restocking. Price increases were offset by higher costs.
The refining business has profited from more favourable gasoline crack spreads which will further improve in the near term. The crack spread is the difference between the price of a barrel of crude oil and the prices of the products refined from it.
The intermediates and derivatives segment showed regaining momentum due to European volumes and margins.
Finally, the technology business, including polyethylene technologies and catalyst sales, has improved revenues and margins.
All in all, nearly all segments increased EBITDA compared to the fourth quarter of 2023. Furthermore, the company expects further improvements in demand, volumes and gas crack spreads for the remaining quarters of the year. Hence, the $1 billion EBITDA of Q1 is probably the minimum EBITDA level of the three remaining quarters in 2024.
Comparing the current EBITDA margin with historical levels, LYB current performance is below the historical margin average which was above 12%.
With growing volumes, more favourable conditions and lower costs in most regions, LYB’s EBITDA margin will likely improve and increase to more than 15%. With annual revenues of more than $40 billion, an annual EBITDA of $6 billion is not impossible in the near future. In 2021 and 2022 the company’s revenues have already surpassed $46 billion and $50 billion.
The company expects robust and increasing demand in Europe and North America but uncertainties in China weigh on the demand for LYB products. The packaging and fuels industry will be a growth driver for LYB while the automotive and construction industry show cautious demand. Any positive development in China or the automotive industry can be a huge upside surprise for the company’s business. The Red Sea disruptions are a temporary tailwind.
3. Valuation
LYB has 326 millions outstanding shares and market capitalization is $32.2 billion (current share price = $98.8). As mentioned before LYB has a long history of generating high cashflows.
| year | 2019 | 2020 | 2021 | 2022 | 2023 |
| operating net cash ($bn) | 4.961 | 3.404 | 7.695 | 6.119 | 4.942 |
| sustaining capital expenditures ($bn) | 1.024 | 793 | 758 | 959 | 1.086 |
| Free Cashflow ($bn) | 3.937 | 2.611 | 6.937 | 5.160 | 3.856 |
The company generated annual free cashflows of $4.5 billion over the last five years. It is likely that LYB can achieve this high amount this year again and can further improve its cashflow generation.
In the first quarter 2024 LYB earned $1.53 per share with further increases in the next quarters. EPS were very low last year compared to historical earnings and will likely increase this year to $7 to $8 per share.
| year | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
| EPS | 12.25 | 12.04 | 9.59 | 4.24 | 16.75 | 11.48 | 6.48 |
| DPS | 3.55 | 4.00 | 4.15 | 4.20 | 4.44 | 4.70 | 4.94 |
LYB has increased its dividend steadily and can spend more for shareholder returns as a result of higher earnings and cashflows. The company also has a long tradition of share repurchases, decreasing the number of shares outstanding by more than 40% since 2010.
Balance sheet
LYB has a total liquidity of $6.5 billion as of 03/31/24 and net debt of $8.8 billion. Current liabilities have been reduced YoY while long-term debt has been stable. Shareholder’s euqity increased YoY by 2% to $13 billion despite returning $1.6 billion via dividends. The debt levels are not critical for its financial health due to high cashflows from its operations. The equity ratio is 35%.
Fundamental ratios and peer comparison
| P/E | CAPE (7y) | P/B | P/EBITDA | P/FCF | gross margin % | yield % | growth % (7y) |
| 12.3 | 9.5 | 2.5 | 7 | 7.2 | 12.8 | 5.0 | 2.5 |
LYB offers a generous dividend yield and an attractive valuation regarding free cashflow and EBITDA. The P/E and P/B ratios are fair for a low-growth company like LYB with fluctuating revenues and earnings.
High returns of nearly 17% p.a. seem to be unrealistic from current share price levels. 11-13% p.a. are more likely, but LYB can start repurchases again to boost shareholder returns in the near future. The company has enough cash and a healthy balance sheet to finance new share repurchases which were important for past returns.
The peers China Petroleum & Chemical Corp. (= Sinopec), BASF and Dow Inc. are currently valued at CAPE7 of 11.7, 18.2 and 18.5 with yields of 8.0% (payout ratio= 74%), 6.9% (payout ratio > 100%) and 4.9% (payout ratio > 100%). LYB shows more stable earnings and no losses while Dow Inc. and BASF had bigger fluctuations and losses in at least one year. LYB has also more room to increase its dividend with a payout ratio below 70%.
Historically, LYB’s valuation is above its long-term valuation with a P/E ratio in a range between 8 to 12. The spike in 2021 was a consequence of a very poor result during the pandemic.
All in all, the P/E ratio of 12.3 is lower than the P/E ratios for two of LYB’s competitors, but higher than the company’s historical average. The yield is lower than the yield of BASF and Sinopec but has greater potential for further increases.
4. Risks and competition
LYB competes with many big chemical companies in the polyolefins market (Sinopec [OTCPK:SNPMF], Dow Inc. [DOW] and TotalEnergies [TTE]) and in the olefins market (SABIC, BASF [OTCQX:BASFY] and Shell [SHEL]). Both markets are expected to grow by more than 4.7% annualy till 2030. There is much room for revenue growth for all companies. The most important region is the Asian market with a market share of 49% in 2022. With growth projections of 4.5% and 4.3% for 2024 and 2025, this region will be an important driver for demand growth in the chemical industry. LYB is well-positioned to profit from long-term industry growth trends. Furthermore, the chemical industry has high entry barriers and existing companies profit from access to infrastructure and resources.
Major risks to the business and revenue growth are significant economic downturns in China and North America. Political conflicts can also influence costs in several regions and can lower margins for a longer period of time. A normalization in the Red Sea region is unlikely for now, but can be a headwind for some of LYB’s operations. The current economic situation around the globe is improving and some cost-driving factors of 2023 are decreasing.
5. Conclusion
LyondellBasell is recovering from a difficult year 2023 and expects improving demand, better gasoline crack spreads and more favourable prices for its products. The company has an impressive track record of high shareholder returns and generates enough cash for further share repurchases and higher dividends. The valuation is fair, but future growth prospects and a healthy balance sheet can lead to annual returns of more than 11% annually.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
