INSIGHT: LyondellBasell has levers to pull

05 December 2007 14:03  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Significantly better upstream integration, linked technologies and markets lie behind the Basell/Lyondell merger.

The new company will be a giant with $42.8bn of annual sales (calculated to 30 September 2007) and underlying EBITDA (earnings before interest, tax, depreciation and amortisation) of $5.1bn, data released by Basell showed last week.

Greater integration in polypropylene (PP), polyolefins and upstream into refining will give the company's businesses more resilience to what increasingly looks like a gathering storm.

Access Industries, through Basell, is paying a lot for Lyondell -- $19.4bn including debt of $5.8bn -- but the potential for cash generation from the combined firms is significant and will sweeten the deal. 

Basell has generated cumulative free cash flow of $1.8bn since August 2005 and Lyondell $5.4bn from the start of 2004.

The acquisition provides most scope for integration along the ethylene and propylene chains and brings more opportunities for upstream integration with the Lyondell owned North America refinery.

LyondellBasell says it want to achieve annual synergy savings of $420m by the third year following the acquisition and $200m of that amount in year one. The savings will come by reducing staffing costs, and more efficient procurement, logistics and distribution.

A $43bn company also has more clout in the market for goods and services. So feedstock sourcing should be more effective and the company reckons it will be able to secure attractive large volume buyer discounts.

LyondellBasell will be the fourth largest chemical company by sales and, by capacity, the world’s largest producer of polyolefins and propylene oxide and one of the top five makers of propylene and ethylene. It expects to benefit from the vertical integration of its chemicals and refining assets.

As the prospect of a capacity-driven downturn looms, the acquisition gives the company a better chance of creating a resilient business mix.

Basell showed last month that it was beginning to feel the squeeze of higher feedstock and energy costs and reduced margins.

The polyolefins business in North America particularly suffered from weaker spreads, the impact not offset by stronger quarterly margins.

The outlook is positive, it said, but highly dependent on economic growth in key markets and feedstock price developments.

Integration of the North America polypropylene business looks as though it could pay greatest dividends.

Lyondell’s naphtha crackers in the US churn out vast quantities of propylene as well as ethylene and C4. Basell has 1.4m tonnes of PP capacity in North America and Mexico that is hungry for feed.

But the integration dividends in polyethylene, regionally in Europe, and in greater feedstock flexibility should not be ignored.

Optimisation of the consumption of natural gas liquids (NGLs), naphtha and gas oil will help the new company shift some production between regions and facilities to optimise profitability.

The Lyondell ethylene and co-products businesses had sales of $13.3bn in the 12 months to 30 September 2007 and Basell’s polyolefins segment operations $14.1bn. At a high point in the cycle both were generating considerable EBITDA.

The technology mix of the new company too should provide further platforms for growth. About 40% of the world’s installed PP capacity at the end of 2006 used Basell process technology. Lyondell is the technology leader in propylene oxide and continues to push for process improvements.

LyondellBasell has many levers to pull to capitalise on integration.

And if Basell’s and indeed Lyondell’s recent record is anything to go by management can be expected to run the businesses hard and continue to focus on debt pay down.

“Our business plan envisages debt pay down even in the anticipated cyclical downturn,” Basell said last week. Low costs and operational reliability will be key drivers over the next few years.

By: Nigel Davis
+44 20 8652 3214

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