Why LyondellBasell’s Americas Segment Has High Margins
High margins for Olefins and Polyolefins Americas segment
LyondellBasell (LYB) is the one of the largest players for olefin and polyolefin products in North America, driven by large-scale manufacturing and an integrated business model. The Olefins and Polyolefins Americas (or O&P Americas) segment produces olefins, polyolefins, aromatics, specialty products, and ethylene co-products along with catalloy resins. These chemical products are used by chemicals, plastics, automotive, consumer, and packaging industries.
The segment benefits from low cost shale gas and natural gas liquids (or NGLs). Therefore, the segment has a higher EBITDA margin of 40.7% as compared to LYB’s total EBITDA margin of 15.5%. The Americas segment contributed 21% to total revenue while it contributed a whopping 55% to LYB’s total EBITDA in 2014.
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LyondellBasell is the second largest and third largest producer of ethylene and polyethylene, respectively, in North America. The company had a capacity of 10.7 billion pounds for ethylene and 5.5 billion pounds for propylene in 2014. In 3Q15, the company further increased its ethylene capacity by 250 million pounds through the expansion of its Channelview facility. LYB has planned to increase its US ethylene capacity by 25% in the next couple of years from 9.9 billion pounds of capacity in 2013.
High margins due to low cost raw materials
Heavy liquids and natural gas liquids (or NGLs) are two primary feedstocks used by olefin facilities in the US. Historically, the facilities with heavy liquids feedstock delivered higher margins as compared to facilities with NGLs feedstock. Now, NGLs have a significant cost advantage over heavy liquids due to technological advances for extracting shale gas, which increased the supply of NGLs. LYB’s facilities can use both heavy liquids or NGLs feedstocks, which gives a competitive advantage to LYB over other players. With the use of these low cost feedstocks, LYB’s Americas operation has delivered higher margins as compared to its other regions.
Dow Chemical (DOW), DuPont (DD), and Westlake (WLK) are major peers in olefins in the United States. Westlake has high EBITDA margins of around 30% as compared to Dow’s EBITDA margins of 16.5% and LYB’s EBITDA margins of 15.5%. This was due to the high margin product portfolio and lower raw material cost.
Investors can invest in ETFs to get exposure to the chemical industry. The Materials Select Sector SPDR Fund (XLB) provides investors diversified exposure to the chemical industry. The combined holdings of Dow and LYB form 18% of XLB.