Could or Should Aramco Buy Lyondell?

Print Friendly, PDF & Email


Graham Copley / Nick Lipinski



November 21st, 2016

Could or Should Aramco Buy Lyondell?

  • Today’s article on Aramco in the WSJ, coincides with some follow-up work that we are engaged in supporting our recent ethylene research and more positive stance on Lyondell.
    • Our fundamental stance is that the global ethylene/polyethylene market is in better shape in 2017 and 2018 than is generally believed, given likely demand growth relative to capacity additions.
    • LYB is very cheap given leverage to the ethylene/polyethylene cycle; the US natural gas advantage gives sufficient cyclical trough earnings to support the dividend.
    • Why would Aramco see LYB any differently?
  • According to today’s WSJ article (11/21/2016) Aramco wants to expand into chemicals in part to diversify and in part to use more of its oil or oil fractions captively.
    • While the LYB US chemical assets are mostly fed from the bountiful US NGL pool, LYB has substantial naphtha based assets in Europe – could be supplied captively.
    • LYB brings technology licensing, downstream polypropylene compounding and a very strong polyurethane feedstock business – things Aramco does not have today.
  • LYB has been quite public about the sale of its refinery and it would be highly likely that Aramco is looking at the asset. The refining dialogue could extend to a whole company dialogue in the same way that Dow and DuPont’s Ag discussion evolved.
    • Aramco could spin out its chem assets into a JV – while paying LYB holders for control.
    • Or Aramco could buy the company outright for cash.
  • If Aramco were to pay $120 per share cash for LYB – 60% of likely incremental interest costs would be covered by the saved dividend expense.
    • While a Dow (materials) /Aramco fit might look just as good on paper today – maybe better given the existing Sadara relationship – Dow is not available today and may not be split into its expected constituent parts for years. LYB is available now.
    • A deal with LYB today would not prohibit a deal with Dow Materials later – the ethylene/polyethylene market remains fragmented – see research.
  • We have no idea whether LYB is a seller or whether Aramco would be interested in buying something this big, but the industrial logic is there – certainly for Aramco.

Exhibit 1

Source: Capital IQ, SSR Analysis

©2016, SSR LLC, 225 High Ridge Road, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein.  The views and other information provided are subject to change without notice.  This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results.

Print Friendly, PDF & Email