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After Chapter 11, LyondellBasell aims to lead
NEW YORK
Petroleumworld.com, Aug 30, 2010Fresh out of bankruptcy and about to list on the New York Stock Exchange, chemicals maker LyondellBasell Industries NV ( LALLF.PK ) ( LALBF.PK ) is riding the dual wave of cheap North American natural gas and increasing demand to become a leader in the commodity chemicals sector.
For investors looking to capitalize on rebounding demand for popular chemicals like propylene, chlorine and polyethylene, the company offers an attractive growth profile, with billions in cash generation each quarter, less debt and an executive team that says it is focused on beating global rivals like BASF SE BASFn.DE, SABIC ( 2010.SE ) and Dow Chemical ( DOW.N ).
"LyondellBasell could soon become the chemical sector investment of choice," Alembic Global Advisors analyst Hassan Ahmed told Reuters. "If my bullish view of the commodity chemical cycle does indeed turn out to be true, you as an equity investor would obviously try to look for a vehicle whereby you can try to play the commodity chemical cycle."
Since launching on pink sheets in early May under two classes of common stock, shares are down about 7.3 percent. Because most shares are controlled by three main parties and trade infrequently, any move by smaller investors tends to fuel fluctuation. A planned listing on the NYSE next month should force stability, as some investment funds would need to reallocate their holdings to include the stock.
Chapter 11, it seems, did wonders for the Netherlands-based company, coming at just the time when chemical companies are deserting the high-volume, low-margin commodity business in favor of specialty chemicals that go into snazzy electronics.
For StarMine comparative data on LyondellBasell, BASF, Dow Chemical, Eastman Chemical ( EMN.N ) and Frontier Oil ( FTO.N ), click here: r.reuters.com/xyz67n
'A NEW ATTITUDE'
LyondellBasell was formed in late 2007 when Basell Polyolefins bought Lyondell Chemical Co. But in early 2009, faced with mounting debt and the global recession, the company put its North American assets into bankruptcy.
What followed was a protracted battle involving creditors, courts and thousands of employees, all of whom had to keep LyondellBasell's numerous assets spinning while their future was decided in a New York courtroom.
In April the company exited bankruptcy with its debt cut by about $23 billion, partly by offering 564 million shares to creditors and new investors.
Most of the company is controlled by Access Industries, Apollo Management APOLO.UL and other private equity firms.
"This is a very sizable company that has emerged from Chapter 11 with a totally new cost structure, new management and new attitude, and I think there are people that would like to play the cycle," Chief Executive Jim Gallogly told Reuters. Gallogly joined the company in 2009 after running various units of ConocoPhillips ( COP.N ).
Low natural gas prices around $4 per 1,000 cubic feet also make petrochemical production in North America extremely cost-efficient, and Gallogly's job that much easier.
Earlier this month the company posted a stronger-than-expected second-quarter profit of $203 million and said it had about $3.6 billion in cash.
The company's $11 billion market value, though, is dwarfed by those of the companies it wants to beat, including BASF's $48 billion, Dow's $27 billion and SABIC's $80 billion.
Executives say that debt covenants prevent dividend payments or buybacks any time soon. However, Alembic's Ahmed said he reviewed the debt agreements and found the company could free up about $430 million for a one-time payout and $50 million annually moving forward.
"While the covenants are fairly restrictive, there are loopholes," Ahmed said.
WORKING THEIR ASSETS
CEO Gallogly says he is streamlining operations at the company's flagship refinery in Houston, which lost out on $65 million in profit after a fire in May.
"The asset has to become world-class in the way that it's operated, and it has not been," he said.
Gallogly is intent on improving his company's historically strained relations with oil-rich Venezuela. He called the South American country a "reliable supplier," but he added he was is in talks with Canadian firms for supply.
LyondellBasell also licenses polyethylene and polypropylene technology to chemical producers around the world. The lucrative model is akin to one used by software firms, in that LyondellBasell sells know-how needed to build and operate plants and then receives royalties.
With its European roots, the company had been licensing to Iranian companies, and the issue was a low priority during the bankruptcy process. But earlier this week its board officially cut all ties with Iran, a country often at odds with the United States but one also sitting atop some of the world's largest natural gas reserves.
Potential problems may also be brewing in Kazakhstan. A 2009 internal review found that the company may have made a payment to secure a project in the Central Asian country in violation of the U.S. Foreign Corrupt Practices Act.
LyondellBasell says it disclosed the information to the U.S. Justice Department but said civil or criminal charges may result and it is not sure how much financially is at stake.
"We may not have conducted our business in compliance with the Foreign Corrupt Practices Act and may not have had policies and procedures in place adequate to ensure compliance," the company said in a recent filing with the U.S. Securities and Exchange Commission.
The culture that allowed that situation to develop, Gallogly said, is one he is trying to change.
"This is not Lyondell of the past. This is not Basell of the past. This is not the company that went into Chapter 11 and had too much debt and had made a number of strategic mistakes," he said. "This is a new LyondellBasell with an attitude of a winner."
Story reporting by Ernest Scheyder from Reuters
Reuters 08/27/2010
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