Olefins Primer III - LyondellBasell & Dow
American olefin pure-plays: capital allocation, markets, competitiveness, liquidity and scenarios.
The Chemical industry is undergoing its longest and most vicious downcycle in recent history. Margins and utilization have rarely been so low for so long, and company prices reflect this.
At the center of this downcycle is the olefins and polyolefins industry, the largest chemical segment by far, and the heart of the petrochemicals and plastics industry. Many large chemical companies have olefin and polyolefin operations, and their economics make or break downstream industries. I provided a 15-page Intro to the industry some weeks ago covering economics, geographies, and trends, and then a double-click on the Big Oil & China trends.
Two American companies are large olefin “pure-plays”, or as pure-play as one can get in diversified chemicals: LyondellBasell ($LYB) & Dow ($DOW). Contrary to other public players in the industry, Lyondell and Dow do not have large upstream refining operations, and, although they participate in several downstream markets (all olefin derivatives), their bulk is olefins and polyolefins. In this sense, they are the ‘purest’ way to play the olefin cycle, especially with a bias towards North American assets.
In this article, we will go over the two companies, analyzing their asset base in detail, position in the cost curve, leverage, past capital allocation, strategic position, and potential earnings under several margin scenarios.
Although (or because) the price of the stocks and the profitability of the companies are at historical lows, a lot of people are very bullish on both LYB and DOW. My read is a little more bearish or cautious: the cycle might last longer (2027-2028), North America’s ethane competitiveness will have challenges, and the company’s have kept high unfunded dividends for a long time, weakening their balance sheets. A position in LyondellBasell or Dow will always depend on a cyclical recovery in olefin and petrochem markets, and this is hard to time. However, I hope that after reading this article, you will have a better understanding of what these companies entail, in terms of risk and opportunities.
Disclaimer: The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.
LyondellBasell ($LYB)
US-based commodity exporter
LYB is the result of the merger of Lyondell and Basell in 2007. Lyondell was a roll-up of chemical assets since the 1980s in the Texan basin, and Basell was a JV between BASF and Shell, which had combined assets mainly located in the Rhine basin (Benelux and Western Germany).
Given its history, it is not surprising that the company had most of its assets and customers in North America and Europe. Since the shale-revolution in the US, most growth investment has gone to capacity in the US.
Today, it is a majoritarily American producer, with a large part of US assets dedicated to exports (US assets 75% of asset base, but NA market ‘only’ 50% of revenues by customer location, potentially lower if customer is a distributor). Since the company announced in late 2024 the divestment of at least 30% of its capacity in polyolefins in Europe, this will become even a larger reality going forward.
When we look at segment profitability, we find a company specialized in commodity, upstream products, mainly polyolefins (O&P Americas segment) and propylene oxide derivatives (Intermediates and Derivatives, with assets also in the US). The weight of specialty products is very low.
The O&PA segment is self-explanatory and forms the core of the company. LYB is the third largest producer in North America of ethylene (6Mt), polyethylene (4Mt) and polypropylene (2Mt). Most of the ethylene and propylene are consumed internally. Today this segment represents almost 60% of EBITDA.
The company has a polyolefin downstream operation (Advanced Polymer Solutions), mainly dedicated to polypropylene compounds used in transportation (car parts), but the segment is small in terms of EBITDA.
The European and Asian polyolefins segment (O&PEAI) is operating at breakeven EBITDA (underwater EBIT) and the company is currently divesting at least 30% of its operations in that market. It maintains its largest base in Wesseling, Germany, where it is concentrating on green production. The company is also relatively strong in polypropylene (the EAI segment is larger than the US in PP) but this capacity is globalized among several JVs (1.8M over 2.5M). In terms of revenues, olefins EAI is almost as large as olefins Americas.
The second important segment is Intermediates and Derivatives, which is basically Propylene Oxide, its derivatives and co-products (oxyfuels, styrene, and acetyls). LYB is the 2nd largest producer of PO worldwide, and also commands a leading cost position, specially from their new (2023) plant in Texas.
Propylene oxide becomes mainly polyurethanes, a market heavily influenced by construction, because of its role in insulation and furniture. It also has smaller roles in the PET chain (plastic bottles, polyester apparel), and in coatings.
Propylene oxide can generate two co-products, TBA or styrene monomer (SM). TBA can then be transformed into oxyfuel (fuel additives). LYB is the largest oxyfuel producer globally, because 70% of its PO capacity is PO-TBA capacity. This market is heavily exposed to vehicle fuel demand. Styrene can be polymerized into polystyrene (packaging), or combined into rubbers (SBR) or hard plastics (ABS).
Finally, in the past the company operated a large refinery operation in Houston, which has already been divested, and also generates some EBITDA from its Technology segment, which licenses polyolefin catalysts and processes. 30% of global PP and PE capacity uses some Lyondell license, and the segment generates very good margins.
Historical capital allocation has been correct
As explained above, the enormous majority of the company’s capital expenditures has gone to the US. In terms of segments, investment was originally concentrated on O&P, and the on the PO chain.
This made a lot of sense, considering the impressive NOPAT returns on long-term assets (unfortunately complete assets per segment including working capital are not reported, but net working capital is maybe 10/20% of PP&E). Even today these segments remain very profitable uses of capital, even if the returns are not as high as during the start of the shale revolution. Further, in both cases, the company has maintained cost competitiveness up to this point in the cycle.
Maybe the company’s worst capital allocation decision was the acquisition of A. Schulman in 2018, which spurred the APS segment. This was a large investment of $2.25 billion, then about 4.5x EBITDA, but by 2022 the segment had lost 2/3s of EBITDA and was operating at breakeven in 2023/24.
Financing has deteriorated by not cutting the dividend
As of 3Q25, the company’s EBITDA probably sits around $2/2.5 billion per year, versus $500/600 million in interest expenses, and about $9.5 billion in net debt. Fortunately, the company has some very lengthy maturities (only $1.3 billion before 2030), and in general at super attractive rates (see table below).
The company is currently maintaining moderate CAPEX plans, with $1.7 billion planned for 2025 and only $1.2 billion for 2026, of which $1.2 billion per year are maintenance CAPEX ($1.1 billion after divesting Europe).
That is, at current margins (or a little worse assuming $2 billion EBITDA) the company should be able to cover interest comfortably, and then pay for maintenance, but not much more.
In this respect, I do not adhere to the policy of keeping dividends and repurchases ($1 billion in 1H25, and almost $2 billion in each of FY24 and FY23, when the cycle was already bad). The dividend, at a current run rate of $1.6 billion, is unsustainable, it cannot be covered by current operations, not even at half that run rate.
Still, the risk stems from a further reduction in margins, which even if temporary, could put the company in a tight liquidity position regarding interest and maintenance. After paying for the 2025 notes, the company will only have cash of $700 million, barely enough to cover a year of interest.
By not cutting the dividend on time, the company’s financial position has greatly worsened. Today, the company has almost no chance but to cut the dividend entirely.
Scenarios and risks
We need to think about what could happen with LYB’s markets, mainly global polyolefins and polyurethanes. In both markets the company commands leading cost positions, otherwise it would not be able to keep the lights on during this stage of the cycle.
Without the financial risk caused by paying too many dividends, the company should have been fairly ok, considering that a negative cycle should have pushed out other players much earlier. However, in today’s financial position, the company could have trouble surviving the last leg of the cycle unless new financing is obtained.
In terms of long-term risks, I believe one is global protectionism forbidding American petrochems from entering some markets (China, India, or other large EMs) and leading to even lower margins in NA. Another, related, is the loss of North American petrochem competitiveness because of LNG pushing on methane (and therefore ethane) prices. I have reviewed those risks in my Intro article on Olefins.
Finally, if we had a global recovery of margins, I doubt they would fully return to pre-pandemic levels, as many believe. Petrochem margins were already falling before the pandemic (also explained in the Intro article). Further, the company has divested many assets (Refinery and Ethylene Oxide in the US, part of Olefins & Polyolefins in Europe).
If we considered today’s assets of about $35 billion, and a potential NOPAT margin on those assets of about 8%, we could be talking of about $4.5 billion in EBIT (lower to mid end of the range in the 2010-2020s decade). Removing $600 million in interest, and 25% taxes, we get to about $3 billion in net income. Compared to that, the company trades today at about $16 billion, or a 5x multiple on that optimistic environment.
Below is a summary table of the company’s strategic position and scenarios considered.
Dow Inc ($DOW)
Note: Dow only has a recent history in its current form, after it de-merged from DowDuPont in 2019. Its previous operational history is accessible via Dow Chemical Company, but the segmentation was different, including many specialty segments that are now part of DuPont and Corteva.
Similar asset and market position
In terms of markets, Dow’s position is somewhat similar to LyondellBasell’s. The differences are mainly higher exposure to olefins (not such a big position in propylene oxide -> polyurethanes -> construction), and consequently also a higher exposure to exports.
Again, we observe a company with assets concentrated in the US (75%), and with even a larger exposure to export markets, specially EMEA + India.
In terms of segment and product lines, we also find a similar view. The core of the company’s profitability remains in olefins and polyolefins, even more so than for Lyondell, which had a larger exposure to propylene oxide (oranges in the case of Dow).
The case of PO is interesting, because Dow claims to be the largest PO producer in the world (Lyondell is the 2nd), and by revenues the II&I segment is slightly larger than LYB’s I&D segment, but despite this, LYB’s is more profitable. This is also interesting because of how much of LYB’s PO production is not in the US (~40%). One of the alternative explanations is that LYB has divested ethylene oxide (PET chain mainly), whereas Dow has not.
Dow also has exposure in relatively profitable specialty segments, acrylic binders (Coatings & Performance Monomers) and Silicones (Consumer Solutions), which remain profitable even today, even though their total contribution is not that large.
When we think of exposures, therefore, we come to similar realizations than to Lyondell, with more exposure to olefins. The Intermediates segment (propylene oxide -> polyurethanes; and ethylene oxide -> PET) is not as big, meaning lower exposure to construction, and potentially to vehicle fuels (via oxyfuel).
Capital allocation
As commented on the note at the start of this analysis, the company was part of a larger chemical conglomerate (Dow + DuPont + Corteva currently) until 2019, meaning a large part of capital allocation was taken with other considerations in mind.
With that said, the company shows something very positive, which is a countercyclical approach to capital allocation, investing more when margins are lower, and less when margins are higher. My qualitative view on the company’s calls are that they are fairly conscient of how to play the capital cycle over the long-term.
The returns on the olefins segment are fairly similar to those of Lyondell US (Lyondell aggregate is in a worse position because of Europe), and they were similar as well in Intermediates, but only until the pandemic. Today, Lyondell has the advantage in this area.
Financing also not great
As of 2Q25, Dow faces very few maturities in the near term, as can be seen below, and most of its debt is fairly cheap in average terms.
This should have been a good strategic advantage to maintain good liquidity. This is, unfortunately, not the situation. Again, part of the error came from continuing to pay unsustainable dividends (at a rate of $2 billion per year). The company has already cut the dividend by half, but it remains unsustainable.
As things stand in 3Q25, the company’s EBITDA stands at maybe $2.5/$3 billion per year. So far, the company has commented on a commitment to invest less than D&A ($2.8 billion) already leaving very little for interest expenses (~$700 million).
That is, CAPEX and interest outflows are not sustained from operations as of today, although maintenance CAPEX could probably be cut by another 50% based on LYB’s maintenance levels, and Dow’s comments in recent calls. Maturities should not be a problem ($500 million between 2025/26), but the company will be financing dividends with asset sales and taking debt.
This year alone the company sold a 49% stake in midstream US assets for $3 billion, and is the only reason why the company has $4.6 billion in cash today. The company also sold other two small assets in Turkey and plans to divest some PO assets in Europe.
Although done by selling assets, Dow’s financial position is better than that of Lyondell, given the larger cash balance, and the potential to lower CAPEX. However, they should take those decisions (and cut the dividend even more) before the situation becomes hairy.
A note on other liabilities
A second click is needed for other types of liabilities in the case of Dow.
First, the company has significant environmental liabilities (accrued or not). At least $1 billion has been accrued, but the company participates in several other large cases.
The second is pension liabilities, with a net underfunding of $1.4 billion as of FY24, but without recognizing OCI losses on pensions of up to $7 billion (probably bonds under the water, or even Dow’s own stock).
Scenarios and risks
Similar assets, similar risks, so we find here rediscussing Lyondell’s risks. Mainly, concentration in US polyolefins leaves the company exposed to protectionism and LNG-driven competitiveness losses.
Using the same optimistic scenario considered for Lyondell. EBIT return on assets are lower than for Lyondell’s (on Lyondell’s chart the return is after taxes), mainly because Dow has more intangibles than Lyondell, probably because of Goodwill recognition during the corporate transactions it has done in the past few years. The effect cancels off because the rate is applied over a larger asset base.
If we considered today’s assets of about $52 billion, and a potential EBIT margin on those assets of about 8%, we could be talking of about $4.2 billion in EBIT (lower end of the range in the 2010-2020s decade). Removing $700 million in interest, and 25% taxes, we get to about $2.6 billion in net income. Compared to that, the company trades today at about $16 billion, or a 6x multiple on that optimistic environment.
Again, summarizing the strategic position and scenarios below.
