On Dec 9, we issued an updated research report on chemical giant LyondellBasell Industries NV (LYB). While the Netherlands-based company should benefit from its expansion projects, it is exposed to volatility in raw material and energy costs and a still challenging European market.

LyondellBasell’s profit for third-quarter 2014, reported on Oct 24, surged on strong gains in its Olefins & Polyolefins – Americas division. Both sales and earnings topped the Zacks Consensus Estimate. LyondellBasell envisions results in the fourth quarter to be favorably impacted by new ethylene capacity at its La Porte facility in Texas.

LyondellBasell, a Zacks Rank #3 (Hold) stock, is benefiting from favorable North American natural gas environment and is executing its expansion projects to leverage the U.S. natural gas liquids (NGLs) advantage.

LyondellBasell remains on track with its ethylene expansion projects. The company’s multi-plant ethylene expansion program, which started last year, represents a total investment of roughly $1.3 billion across its Channelview, La Porte and Corpus Christi facilities in Texas which benefit from shale gas production. 

LyondellBasell has already completed an 800 million pound per year expansion at its La Porte site and expects the addition of 800 million pounds of capacity at the Corpus Christi plant to complete by late 2015. Expansion at the Channelview facility is currently underway (expected to increase production by 250 million pounds annually) with expected completion in early 2015.

The expansion program, when in full swing, is expected to expand annual ethylene capacity by an estimated 1.85 billion pounds in North America. LyondellBasell is also evaluating further expansion at its Channelview plant in Texas that would potentially add ethylene capacity by up to 550 million pounds annually and further boost annual ethylene capacity to 2.4 billion.

LyondellBasell also remains committed to deliver greater value to its shareholders leveraging healthy cash flows. The company returned $1.6 billion to its shareholders in the form of dividends and share buybacks in the third quarter.

However, LyondellBasell faces volatility in raw material and energy costs that account for a major portion of its operating costs. Moreover, the recent drop in crude oil prices could erode the feedstock cost advantage that is so far enjoyed by the company and eventually hurt its U.S. olefins margins and profitability.

LyondellBasell is also exposed to macroeconomic uncertainties and volatility across end-use markets it serves. The company derives a major chunk of its sales and earnings from the European market which is not out of the woods. The sluggish European economy may affect its business in the region.

LyondellBasell’s businesses are also affected by cyclicality of chemical and refinery industries. The company also faces pricing pressure as it operates in highly competitive markets.  

Other Stocks to Consider

Other companies in the chemical space worth considering include Innospec Inc. (IOSP), Valhi, Inc. (VHI) and Celanese Corporation (CE). While both Innospec and Valhi hold a Zacks Rank #1 (Strong Buy), Celanese carries a Zacks Rank #2 (Buy).

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