North America, 57% Europe, 30% Other, 13% FY12 Revenue by Geography Corporate Credit Profile November 2013 Moody’s: Baa1/Stable S&P: BB+/Positive 1 • First Principles Capital Management, LLC LYB • Credit Profile LyondellBasell Industries N.V. (LYB) Business Profile LYB is one of the world’s largest chemical companies. It operates predominantly flexible ethylene crackers 1 in the U.S. and naphta crackers in Europe. The company also operates a refinery in the U.S. The company converts natural gas liquid feedstock into plastic resins and other chemicals and crude oil into fuels, such as gasoline, diesel, and jet fuel. The end products cater to various end segments, including transportation, packaging, building, construction, consumer, and textile. LYB has four major business segments: O&P Americas – produces olefins, including ethylene products, and polyolefins. It is the largest producer of ethylene, propylene, and polypropylene (PP) and the third largest producer of polyethylene (PE) in North America. LYB has approximately 13% and 17% of the total domestic PE and PP capacity share. O&P Europe, Asia, International (EAI) – produces olefins and polyolefins. The segment is the largest producer of PP (25% of capacity share) and PE (16% of capacity share) in Europe and the largest worldwide producer of PP compounds. Source: Company Reports Technology, 1% Olefins & Polyolefins- Europe, Asia & International, 29% Refinning, 26% Olefins & Polyolefins- Americas, 25% Intermediates & Derivatives, 19% FY12 Revenue by Product 1 Crackers are facilities in which a feedstock such as naphtha, liquefied petroleum gas, ethane, propane or butane is thermally cracked through the use of steam
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North America, 57%
Europe, 30%
Other, 13%
FY12 Revenue by Geography
Corporate Credit Profile November 2013
Moody’s: Baa1/Stable
S&P: BB+/Positive
1 • First Principles Capital Management, LLC LYB • Credit Profile
LyondellBasell Industries N.V. (LYB)
Business Profile
LYB is one of the world’s largest chemical companies. It operates predominantly
flexible ethylene crackers1 in the U.S. and naphta crackers in Europe. The company also
operates a refinery in the U.S.
The company converts natural gas liquid feedstock into plastic resins and other
chemicals and crude oil into fuels, such as gasoline, diesel, and jet fuel. The end
products cater to various end segments, including transportation, packaging, building,
construction, consumer, and textile.
LYB has four major business segments:
O&P Americas – produces olefins, including ethylene products, and polyolefins. It is the
largest producer of ethylene, propylene, and polypropylene (PP) and the third largest
producer of polyethylene (PE) in North America. LYB has approximately 13% and 17%
of the total domestic PE and PP capacity share.
O&P Europe, Asia, International (EAI) – produces olefins and polyolefins. The segment
is the largest producer of PP (25% of capacity share) and PE (16% of capacity share) in
Europe and the largest worldwide producer of PP compounds.
Source: Company Reports
Technology, 1% Olefins &
Polyolefins-Europe, Asia
& International,
29%
Refinning, 26%
Olefins & Polyolefins-Americas,
25%
Intermediates & Derivatives,
19%
FY12 Revenue by Product
1 Crackers are facilities in which a feedstock such as naphtha, liquefied petroleum gas, ethane, propane or butane is thermally cracked through the use of steam
Intermediates and Derivatives produces propylene oxide and its co-products and
derivatives, as well as acetyls, ethylene oxide and its derivatives. LYB is the second
largest producer of polonium (PO) globally with 19% capacity share.
The Refining segment refines crude oil at its Houston refinery. The firm is the largest
global producer of MTBE (Methyl Tertiary Butyl Ether) and ETBE (Ethyl Tert-Butyl
Ether), which are gasoline additives that help meet increasing standards for cleaner
burning fuels.
Recent Events
Prior history of bankruptcy. The January 2009 bankruptcy filing was triggered by
aggressive leverage and insufficient liquidity, as the company faced increasing oil and
natural gas prices and declining demand during the last downturn. LYB emerged from
Chapter 11 in April 2010. Post bankruptcy, a new management team (former Chevron
executives) restructured the business.
Ramp-up of share repurchases. LYB issued 10-year and 30-year bonds for a total of
$1.5 billion in July 2013, mostly for share repurchases. The company has spent $1.3
billion on share repurchases since it received approval in May of up to 10% of the
company’s outstanding stock, leaving approximately $3 billion worth of share
repurchases under the program.
Reduction of private equity ownership. Following a series of trades over the past year,
Apollo Management has continuously reduced its ownership stake in LYB to ~5%, down
from a one-third stake back in 2010. In 2008, the private equity firm had invested $2
billion in distressed debt of the company’s U.S. unit. The debt was converted into an
equity stake in a subsequent bankruptcy reorganization. Including the recent trade,
Apollo has taken out over 3.5 times its initial investment, and is expected to come back
to the market to sell its final block of shares in LYB. Of note, Access Industries, run by
Russian investor Leonard Blavatnik, still owns ~15% of LYB.
Growth projects. After spending the last several years shutting down multiple higher-
cost units, management is focusing on maximizing the production capacity. The
company initiated multiple capital growth initiatives in 2012 which will be coming
online through 2016, for an estimated total cost of $1.8 billion. Post completion, LYB’s
ethylene capacity in the U.S. will increase by 18%, further exploiting LYB’s cost
advantage versus European and Asian peers which is underpinned by low cost NGL
2 • First Principles Capital Management, LLC LYB • Credit Profile
(Natural Gas Liquid) feedstocks, in particular ethane.
Credit rating upgrades. In March 2013, S&P upgraded LYB’s credit rating from BBB- to
BBB. Moody’s also upgraded the credit rating twice in 2013, from Baa3 to Baa1 in May
2013 and August 2013 given continued improving credit metrics and a reduction in
Apollo’s equity ownership in the company.
Industry Update
Over the last cycle, U.S. ethylene producers had much higher cost structures
compared to European and Asian producers as U.S. natural gas prices spiked.
However, with the increase in crude oil prices and advent of shale gas, U.S. producers
have significantly lowered their cost base.
North American ethylene producers using NGLs continue to realize peak-like ethylene
margins (see chart on pg 3). Persistently high crude oil prices have kept ethylene
prices elevated through 3Q13 although prices are expected to decrease in 4Q13 due
to seasonally lower demand. Meanwhile, ethane-based ethylene margins remain at
near-peak levels due to inexpensive ethane feedstocks. Margins for offshore crude oil-
based producers remain challenged by a persistently high oil price, hence the cost of