Case Study on a Chemicals Company
Instead of seeking the short-term trade, we prefer to actively look for solid companies that we believe will outperform over a longer period of time. One such promising opportunity currently held in the All American Equity (GBTFX) and Global Resources Funds (PSPFX) is materials company, LyondellBasell (LYB).
Lyondell is one of the world’s largest plastics, chemicals and fuels companies, pays a dividend and just announced that it intends to repurchase up to 10% of its outstanding shares over a 12-month period. A “combination of organic cash generation and financial flexibility” could be potentially profitable for its shareholders, as over the next two years, returning “cash to holders of more than 30% of Lyondell’s equity market capitalization,” says Bank of America Merrill Lynch (BofA-ML).
The company is poised to benefit from a recent trend that’s been developing in the chemicals sector. In a recent report, BofA-ML reported that ethane will likely be oversupplied for the next three years. This is causing ethane to “trade near ‘floor’ prices as determined by the value of natural gas over this period.” With natural gas currently sitting below $4 per million British Thermal unit (MMBtu), ethane will likely average less than $0.30 per gallon.
Ethane is the raw material that’s used in the petrochemical industry, and cheap ethane translates to significantly increased profit margins for U.S. chemical companies, including LyondellBasell.
You can see in the chart below that U.S. chemical companies have much higher profit margins compared to their global peers, with profit margins around $0.50 per pound. This compares favorably to the chemical companies in Europe and Northeast Asia, which have current margins at $0.20 and $0.05 per pound, respectively. These companies use what’s called polyethylene naphtha, which is polyethylene made from the raw material, naphtha. Naphtha is oil-based, and because oil is much more expensive to natural gas, ethane is a cheaper feedstock.
This is just one example of opportunities you can find in today’s market if you keep calm and carry on.