INSIGHT: Lyondell to face a world in flux after bankruptcy

16 March 2010 16:50  [Source: ICIS news]

A Lyondell siteBy Al Greenwood

HOUSTON (ICIS news)--Lyondell Chemical will face a market still recovering from one of the worst downturns since the Great Depression once it exits Chapter 11.

Since filing for bankruptcy protection in January 2009, Lyondell has made significant progress towards financial recovery.

Last week, the company received court approval for both an equity offering and a key settlement to partially dismiss a lawsuit.  

Moreover, Lyondell has lined up support for its reorganisation plan from a majority of key creditor groups. The court could holding a hearing to confirm the plan on 23 April, and if it is confirmed, Lyondell could emerge from bankruptcy soon afterwards.

The reorganised Lyondell would have removed roughly 90% of its prior debt, according to Moody's Investors Services.

Moody's gave its parent company, LyondellBasell, a corporate rating of B1, placing it roughly in the middle of its speculative ratings.

LyondellBasell's operating results for 2009 shows a mixed outlook.

The company's refining segment continues to lose money, posting a $32m (€23m) operating loss in January after ending 2009 with a $357m loss.

The global downturn weakened demand for gasoline and other oil products. Meanwhile, the discount Lyondell usually received from refining less expensive heavy crude instead of light began to narrow.

That discount is crucial for Lyondell's Houston refinery, which relies on heavy crude for about 86% of its 268,000 bbl/day refining capacity.

Looking forward, Lyondell expects that refining will remain weak in the first part of 2010.

Lyondell is not alone in its outlook. Both Shell and Chevron cited a weak refining market when they announced job cuts numbering 2,000 each.

Valero, the largest independent oil refiner in the US, also suffered from weak demand and lower discounts in 2009. During a conference call, Valero said the refining industry anticipates that 2010 will be another rough year.

In contrast, Lyondell's olefins and polyolefins segment in the Americas benefited from advantaged natural-gas feedstock for much of 2009. The ratio of crude oil prices to natural gas exceeded 12. The two are at parity when the ratio approaches 6.

With the discount from Americas production, Lyondell's polyethylene (PE) enjoyed an advantage in export markets, helping the segment post an operating income of $169m for 2009.

Going into 2010, US ethylene prices spiked due to outages. Prices, however, are heavily backwardated, with future values well below current levels.

Going forward, the segment's fortunes will depend on a US recovery and foreign demand.

In Europe, Lyondell's olefin and polyolefins business relies on heavy liquid feeds. Consequently, it does not benefit from the same feedstock advantage as the Americas.

In 2009, the segment suffered from lower margins and lower sales - primarily in Europe. For the year, the segment reported an operating loss of $13m.

Lyondell's fourth segment - intermediates and derivatives - produces such products as propylene oxide (PO), ethylene oxide (EO), ethylene and propylene glycol, butanediol (BDO) and acetyls.

Those markets generally improved in the course of 2009, with Lyondell restarting one of the two PO facilities it idled in late 2008. For the year, the segment reported an operating income of $250m.

Lyondell's technology segment, largely based in Europe, sells polyolefin catalysts and licences polyolefin technology. Higher catalyst sales helped the segment report an operating income of $210m for the year.

Regardless of the business climate, Lyondell is under much pressure to leave bankruptcy protection as soon as possible.

Lyondell estimates that each month in Chapter 11 costs the company $50m. Three additional months in bankruptcy could nearly wipe out the income that a business segment earned for all of 2009.

Longer term, an extended stay in bankruptcy erodes Lyondell's reputation, and customers, vendors and employees could gradually lose confidence.

(Additional reporting by David Barry)

($1 = €0.73)

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By: Al Greenwood
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