Higher oil prices to boost LyondellBasell outlook - US report

29 November 2010 17:00  [Source: ICIS news]

LyondellBasellHOUSTON (ICIS)--Earnings for chemical major LyondellBasell should flourish over the near-term because of growing demand for oil and subsequently higher prices, a US investment bank said on Monday.

“While the attention of investors seems to be focused on the low-cost feedstock advantage of North American ethylene production tied to what seems like an abundance of ethane, we want investors to understand that LyondellBasell is, in our view, a play on oil/gasoline,” said Charles Neivert, managing director with Dahlman Rose, a US firm.

“This is especially true when ethylene is in a globally long supply/demand environment,” he added. “We sense that this situation may be underappreciated by investors.”

As such, Dahlman Rose initiated its coverage of LyondellBasell with a “buy” rating and a 12-18 month price target of $38.

LyondellBasell shares began trading on the New York Stock Exchange in October, after emerging from US bankruptcy protection earlier in the year.

On Monday, shares of the company fell by 28 cents, or 1%, to $29.10/share.

Dahlman Rose said it expected oil prices to approach $95/bbl by late 2011, taking naphtha prices higher as well and leading to higher costs for heavy-feed ethylene production.

That would generally help US ethylene and polyethylene (PE) producers by maintaining competitiveness in export markets, Neivert explained.

“Our earnings outlook is clearly coloured by our view on oil pricing, which we believe will rise as global economies recover,” Neivert said.

Dahlman Rose said it saw strong growth in oil demand as a given in developing countries such as China, but the rise in oil prices would depend largely on European and US economies getting healthier, the report said.

Higher oil prices would also increase the value of methyl tertiary butyl ether (MTBE), since MTBE’s value is tied to the value of octane in gasoline, Dahlman Rose said.

As such, MTBE margins could increase, benefiting LyondellBasell’s oxyfuels segment – one of the world’s largest, according to the report.

Refining crack spreads should also increase from current levels, partly reflecting higher oil prices as well as rising demand for refined products and higher refinery operating rates, Neivert said.

Additionally, higher oil demand should bring heavier crudes to market, widening the Maya/WTI spread.

The company's Houston Refinery in Texas is among the largest in North America that can process large amounts of heavy, high-sulphur crude.

“The widening of the two elements of the refinery margins is a significant benefit for LyondellBasell,” Neivert said.

“While we do not assume a rebound to anything like peak levels seen in 2007/2008, we do see significant upside to LyondellBasell margins in the refining and oxyfuel segment as a result of these developments,” he added.

Dahlman Rose also said it expected better margins from LyondellBasell’s polyolefins products, explaining that any margin compression in ethylene could be regained in polyolefins, particularly in the US.

Specifically, polypropylene (PP) margins could benefit from higher oil prices and higher-cost propylene from propane dehydrogenation (PDH) units, the report said.

In its most-recent earnings release, LyondellBasell posted a third-quarter net income of $467m (€350m), compared with a net loss of $651m in the year-earlier period on the back of increased demand for polyolefins and higher ethylene sales prices.

That followed a similarly strong second-quarter earnings announcement, during which the company and analysts credited gains to the substantial cost advantage enjoyed by US ethane-based commodity chemical producers.

Neivert said he expected more ethane demand coming over the next 12-24 months, keeping the US ethane market balanced to snug despite new fractionation capacity coming on line.

As a result of rapidly rising supply and demand, ethane pricing should be volatile, Neivert explained – further tying LyondellBasell’s fate to the oil and gasoline markets.

Overall, Dahlman Rose predicted LyondellBasell’s earnings/share (EPS) to hit $3.24 for full-year 2010 before falling slightly to $2.96 in 2011.

The $38/share price target would represent an upside of about 30% from current levels.

($1 = €0.75)

For more on LyondellBasell visit ICIS company intelligence
For more on olefins and polyolefins visit ICIS chemical intelligence
To discuss issues facing the chemical industry go to ICIS connect

By: Ben DuBose
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