LyondellBasell Industries

We are transferring coverage of BASF, Dow, and LyondellBasell, which are some of the largest global commodity chemical producers. These firms primarily create value by converting oil and natural gas liquids into higher-value plastics, polymers, foams, and additives for a wide range of end markets.

The bottom line: We are lowering our fair value estimate for BASF to EUR 55 from EUR 61, for Dow to $32 from $48, and for LyondellBasell to $75 from $95. We assume that the return to midcycle levels will be gradual and structurally lower than past cycles, driven by oversupply from China. We lower Dow's moat rating to no moat. We view production exposure to regions outside of North America and the Middle East as a disadvantage. We think Dow is overexposed to high-cost European production, amid structurally weak industrial demand, eroding a potential moat. We are maintaining our moat ratings for BASF and Lyondell at none and narrow, respectively. We are also maintaining a Standard Morningstar Capital Allocation rating for Lyondell, while lowering our Capital Allocation Rating to Poor for Dow, and upgrading BASF to Standard.

Big picture: While the conflict in the Middle East has provided temporary relief for commodity chemical pricing, we don't view it as a resolution to the oversupply that has weighed on the industry for the past three years. We see Lyondell as having the most upside, following major capacity closures in Europe. This will unlock cash for Lyondell to protect its dividend and defend the balance sheet, and improve its competitive positioning. These actions should prompt a rerating of the stock. Ultimately, more capacity closures and slower additions are needed for the industry to return to midcycle levels. The primary risk is material capacity additions in East Asia, with global supply continuing to outpace demand, delaying a recovery implicit in our estimates across all three names.

After transferring coverage to a new analyst, we are lowering our fair value estimate to $75 from $95. Lowering our midcycle EBITDA margin assumption by around 100 basis points primarily drove the change. We think global oversupply dynamics driven by Chinese capacity additions lead to structurally lower midcycle margins.

Still, we think the market is assuming oversupplied conditions will become the new normal, leaving Lyondell with compressed margins across most of its segments. We aren’t so pessimistic for two key reasons: we believe the US-Iran conflict will accelerate rationalization, particularly in Western Europe where oil and natural gas prices are prohibitively high. We also think Lyondell’s moves to shut down high-cost European capacity will structurally lift margins, lower maintenance capital spending, and improve cash conversion. As this plays out, we expect the market will rerate Lyondell slightly higher to a 6.2 times 2026 enterprise value/adjusted EBITDA multiple. Notably, this is lower than the long-run median of around 7-8 times.

In the near term, we forecast that the US-Iran conflict will create a supply shock in commodity chemicals and energy, raising prices and feedstock costs for chemicals producers outside the US. As a result, Lyondell should benefit from higher prices and volumes, as it can run its US plants at near full capacity. However, as the supply shock eases, we see profits falling in 2027 before slowly returning to midcycle levels over the remainder of our five- year forecast. We forecast midcycle adjusted EBITDA margin in the midteens.

We assign LyondellBasell a narrow moat rating based on cost advantage and intangible assets. We award moats to commodity chemical processors who consistently convert low-cost raw materials into higher-value materials and sell them to downstream manufacturers. The value that Lyondell creates and captures is the price spread between its inputs and its products multiplied by the volume it can produce and sell.

Lyondell’s regional exposure creates favorable feedstock economics and utilization rates.

Chemical feedstock costs run at about 60%-70% of cost of goods sold. Ethane, the largest natural gas liquids stream, is used almost exclusively for ethylene. The US and Middle East are the lowest-cost ethylene regions with access to cheap natural gas, while Europe and Asia rely on costlier naphtha. Most of Lyondell’s assets are in the top quartile of cost to manufacture ethylene globally, aided by US Gulf Coast trade access and cheap NGLs from the Permian, Appalachia, and Haynesville basins. These dynamics especially favor Lyondell amid high oil prices and low gas prices, which steepens the global cost curve. Even so, we expect the gas/oil spread to stay wide enough to preserve the US cost advantage that Lyondell benefits from, even if that ratio compresses. Our midcycle assumptions are $65 per barrel Brent and $3.70 per million Btu Henry Hub gas, representing a three times price spread on a barrel of oil equivalent basis, which yields Lyondell low-double-digit returns on capital.

We peg the economic breakeven for Lyondell’s largest O&P Americas segment at around $63 per barrel (Brent) for oil and $4 for natural gas. Price spreads haven’t been this narrow since 2008, and given the US-Iran war’s impacts, we’d expect a period of elevated oil prices, making this scenario unlikely. We believe fiscal 2025 was a good example of a trough-cycle scenario; global demand was historically weak, and oil prices briefly sank below $60/bbl. Lyondell took appropriate actions to protect long-run economic returns, specifically reducing its wholly owned European ethylene capacity by close to 40%, where returns suffered most.

Also, while persistent olefin oversupply has plagued volume and held utilization rates structurally lower, Lyondell is better off than some of its global chemical peers. That’s due to its heavier US manufacturing footprint, and more importantly, its lower concentration in Europe. Around 15% of Lyondell’s companywide ethylene capacity sits in Europe. This matters because European production is fundamentally disadvantaged by high feedstock and power costs. We estimate that in the past five years, Lyondell’s US steam crackers have operated between 80% and 90%, based on quarterly commentary. We use a midcycle estimate range of 80%-90% utilization for Lyondell’s US production, and 60%-70% for Lyondell’s European O&P production. Under a bearish scenario, we think Lyondell’s utilization rates hold relatively firm in the US, only dipping below 80% amid extreme demand destruction like during covid-19 (75% utilization rates).

Cost advantage in Lyondell’s olefins and polyolefins Americas and intermediates and derivatives segments drives our moat rating.

Lyondell’s O&P Americas and Europe, Asia, and international segments share similar assets and products across regions and together make up most of Lyondell’s sales mix. O&P EAI is a no-moat segment, but the sale of four European assets reduces Lyondell’s higher-cost European exposure relative to commodity peers, supporting the firm’s overall cost advantage. So, we expect that Lyondell’s narrow-moat O&P Americas’ double-digit segment returns should help drive firmwide incremental returns up by high single digits at midcycle.

Its intermediates and derivatives segment also earns a narrow moat in propylene oxide, or PO, and tertiary butyl alcohol, or TBA, production, which is primarily used to make high-octane gasoline additives like MTBE (methyl tertiary-butyl ether). Margins have been comparatively stable given less excess supply; most refiners prefer to use ethanol as a gas blend in the US, so Lyondell effectively controls North American market share and sends most of its MTBE to Mexico, where it is a legally permitted gasoline blend; ethanol blending is severely restricted. Lyondell's process relies on internal propylene and produces oxyfuel co-products, unlike the costlier chlorohydrin process used for over half of global PO capacity. I&D also diversifies Lyondell's overall demand exposure toward gasoline blending and refining rather than packaging and industrials. This matters because it can blunt a downturn in global plastics demand, which would harm Lyondell’s earnings power.

Lyondell’s technology segment earns a narrow moat based on intangible assets.

The technology segment licenses Lyondell's low-cost production processes and generates high-margin (40%-50%), patent-protected recurring revenue that scales with global production growth. Even in the flat growth environment over the next decade, we expect this segment to generate double-digit returns, marking Lyondell’s highest returns on capital given its asset-light nature and difficult-to-replicate proprietary moat.

Industrywide overcapacity is the primary risk to Lyondell’s moat.

Oversupply is an ever-present threat to the chemical producer. Still, we don't think it's likely to erode Lyondell's moat. Today's petrochemical overcapacity stems from three forces with distinct incentive structures: the US shale buildout, state-backed capacity additions in the Middle East and China, and industry assumptions of secularly declining refined-product demand. Of the three, we think continued Chinese expansion poses the strongest threat to Lyondell's moat, since state-backed supply can expand independent of unit economics, but we think Lyondell is partly insulated given its advantaged US feedstock cost position and its already-rationalized ex-US footprint.

LyondellBasell benefits from its cost-advantaged North American operations that use low-cost natural gas-based feedstock.

By licensing its chemical and polyolefin process technologies, LyondellBasell can secure asset-light revenue streams that often lead to long-term supply agreements.

LyondellBasell maintains exposure to a wide variety of industrial and consumer end markets, somewhat mitigating the risk of an industry-specific downturn.

Chinese and Middle Eastern capacity additions will keep global polyolefin prices suppressed, structurally lowering the margins of Lyondell’s core business.

LyondellBasell’s North American natural gas feedstock-based cost advantage will erode over time due to the proliferation of LNG exports.

LyondellBasell will have to cut its dividend further due to the current downturn, as debt levels rise and free cash flow will not be able to cover the dividend payment.