LyondellBasell Industries N.V.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3.5/5

LyondellBasell Industries N.V. is a global chemical company that produces plastics and chemicals for various industries, with operations spanning from refining to intermediate and advanced polymers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: LyondellBasell (LYB) operates in a cyclical and commoditized sector, with its operations spanning across multiple segments. Here’s a breakdown of its key areas:

  • Olefins and Polyolefins (O&P) - Americas: This segment produces polyethylene and polypropylene—the building blocks for many plastic products—as well as related chemicals in the Americas. It’s a large part of LYB’s business as the company is the one of the largest producer of polypropylene in that area.
  • Olefins and Polyolefins (O&P) - Europe, Asia, International: The segment performs similarly to the Americas segment, but for the European, Asian and International markets.
  • Intermediates and Derivatives (I&D): This segment creates derivatives, such as propylene oxide, which can be used to produce everything from foams to plastics to antifreeze.
  • Advanced Polymer Solutions (APS): This is a more specialty product sector, as it is focused on compounds, composites, masterbatches, powders, and solutions for various industries and performance materials.
  • Refining: This segment is comprised mostly of a single oil refinery that produces gasoline, diesel, and other petroleum-based products.
  • Technology: This division licenses LYB’s process technologies.
  • Other: This segment includes smaller, less significant revenue drivers and business segments.

Industry Trends and Competitive Landscape: LYB operates in a cyclical industry that is heavily affected by commodity prices, supply chain dynamics, and macroeconomic conditions. Here’s what the company is facing:

  • Competition: The industry is competitive, with other large chemical companies and regional producers competing for market share. This is clearly indicated in the company’s 10-K and shows how a competitive threat can cause their sales to go down.
  • Cyclicality: Demand and prices fluctuate according to economic cycles, impacting earnings. This is very evident from examining the company’s performance and results for a range of years and looking at industry average ROIC, you will often see how it varies through the economic cycles.
  • Raw Material Costs: Feedstocks, primarily oil and natural gas, can be volatile, affecting the company’s profitability. In a recent quarterly earnings, we can see that margins were reduced by increase in raw material costs.
  • Environmental Regulations: Regulations aimed at reducing emissions and the use of plastics may increase costs and restrict markets. The company also has to plan for the future implications of global warming and carbon regulations.
  • Geopolitics: Ongoing disruptions have increased volatility in energy prices, and in turn, commodity prices.
  • Oversupply: With China aggressively growing its production capacity for many basic chemicals and plastics, competition in price will increase, leading to a reduction of prices for companies that make them.
  • Global Market: While U.S. and Europe remain important markets for LYB, developing nations, including China and India, will drive much of the growth in the chemicals and plastics industries.

Moat Assessment: 2/5 LYB possesses some of the building blocks of an economic moat, but it is not a clear moat and it is easily breakable:

  • Scale Advantage: It has massive production facilities to get economies of scale in the production of chemicals and plastics.
  • Unique Technologies: The company has some specialized techniques for certain chemicals that reduce costs and ensure they have some uniqueness.
  • Brand/Customer relationships: Its brand isn’t very important and customer stickiness is pretty low, so it can be affected by other companies.
  • Switching Costs: Most of its customers incur low-switching costs.

In most cases, LYB faces intense competition and pricing is the biggest point on a customer’s mind. This does not offer them any kind of pricing power to raise its prices significantly.

  • Moat Rating: Based on these factors, LYB’s moat is judged to be 2 out of 5. Although it has a few good attributes, it lacks the real differentiation to provide a strong and long lasting moat.

Risks to the Moat & Business Resilience: Several factors can harm LYB’s business and its ability to sustain profitability:

  • Commodity Price Volatility: Fluctuations in oil and natural gas prices directly affect input costs and profit margins, causing financial volatility for the company. In addition, a high supply of cheap raw materials from China could cause a reduction of prices.
  • Economic Downturns: The cyclical nature of its business is easily impacted by economic downturns that reduce demand for its products.
  • Environmental Regulations: Increased regulatory pressures could lead to higher operational costs and market restrictions, reducing their prices and margins
  • Technological Disruptions: Any breakthrough in new plastics, like more biodegradable plastics, would quickly render LYB products obsolete and less valuable to its customers.
  • Competitive Pressures: New competitors can erode market share, leading to lower pricing power. LYB has many competitors who can easily produce and sell many chemicals and polymers in a competitive market.
  • Operational Risks: Accidents, process disruptions, and accidents could halt production and impact cash flow.

LYB’s business is somewhat resilient to these challenges, as it operates in established industries and has been operating for many years. It may not be the best long-term company though as the business model does have some difficulties.

Financial Deep Dive: Let’s delve into LYB’s financial performance:

  • Revenue Streams: LYB’s revenue is mainly derived from its O&P segments, which contribute a significant portion of sales. These are commodity products, meaning they are often subject to volatile price swings.
  • Margins: Overall, LYB’s margins tend to be correlated to the business cycle and commodity prices. There is a direct correlation between the prices of oil and gas and the company’s profit margins.
  • Profitability: The company’s overall profitability is significantly influenced by the prices of its raw materials, most of which are sourced from oil. Their ROIC is heavily reliant on the price of crude oil and can vary heavily, which is why their ROIC has a greater range in the exhibit showing the data since 1963 to 2023. The cyclical nature of the company is clearly visible as they face boom and bust.

From their latest 10-Q report, here is what they reported:

Net sales $10.03 Billion this quarter compared to $13.41 Billion in 2023. Clearly, revenues are down because of lower prices and demand. Income from continuing operations Income was $731 million compared to $1.196 Billion. The net income has declined 39%, so clearly margins are lower and not good. Free Cash Flow They generated free cash flow of $1.135 billion, which may lead to increase share repurchases or dividends.

  • Balance Sheet: The company does have quite a lot of debt, but their cash and assets are enough to fulfill the debt requirements. The net debt is equal to 2.1 times EBITDA, which is decent but should be reduced over the long term.
  • Capital Allocation: The company uses its cash to do acquisitions, but it does prefer buying back stock and increasing dividends. The dividend yield is over 5%, which makes it interesting for investors seeking income.

Recent Issues & Management Outlook

  • Low Demand in Europe: LYB’s operations in Europe, in particular, have struggled in the recent quarters, which leads to lower margins and profitability.
  • Acquisitions: LYB’s acquisition strategy is focused on acquiring companies that help with their strategy and also use their cash for growth.
  • Volatile Oil Prices: The prices of oil are still volatile and have large effects on LYB’s input prices and profitability. These prices will continue to affect them in the foreseeable future.
  • Share Buybacks: The company intends to repurchase shares in the future, so it would appear that management thinks its stock price is relatively undervalued.
  • Macroeconomic conditions: The management states that macroeconomic uncertainty is continuing to affect their business and they do not expect the next quarters to perform much better.
  • Sustainability: LYB is focused on sustainability and creating a more circular economy with its products. The CEO says they will pursue these goals and will help lower their impact on climate change.

Understandability: 3 / 5 The underlying business of chemicals is not complicated to understand, as they convert raw materials into plastic and chemicals. However, analyzing their financials and forecasting revenues based on the cyclical behavior of the commodity market can make it difficult to understand for a new investor, but overall, this business is not very complicated and receives a 3 out of 5.

Balance Sheet Health: 3.5 / 5 LYB’s balance sheet is decent, but not without its weaknesses. While it has adequate assets to cover liabilities, a high amount of debt and sensitivity to the cyclical market fluctuations. Because of this, it gets a 3.5 out of 5.