LyondellBasell Earnings: Near-Term Headwinds Will Persist Through Year-End; Shares Still Undervalued

LyondellBasell’s LYB third-quarter results reflected continued challenges arising from a sluggish global macroeconomic environment, with sales down 13% year over year. Favorable tailwinds contributed to year-over-year EBITDA margin expansion exceeding 370 basis points, though most of this is attributable to two one-off events during the quarter rather than a signal of improving market dynamics. We don’t expect significant improvements through year-end either, though we remain optimistic that end markets will begin to recover around 2024 and beyond. We lower our fair value estimate to $118 per share from $124 and maintain our narrow moat rating. Shares remain slightly undervalued at the time of writing.

The firm opened its new facility for manufacturing propylene oxide and tertiary butyl alcohol, together denoted as PO/TBA, in Houston during the quarter. LyondellBasell’s global PO/TBA production capacity expanded 35% to 4.4 million tons per year, in line with its North American polyethylene capacity of 4.1 million. The facility will significantly shift the firm’s overall product mix moving forward, and we expect margins for the firm’s intermediates and derivatives segment will average in the high teens moving forward. The segment’s EBITDA margin jumped to 23% this quarter due to serendipitous timing of the PO/TBA plant’s opening and unanticipated downtime from several assets across the U.S. Gulf Coast arising from unplanned maintenance requirements. We expect pricing and margins will normalize once that capacity comes back online.