Jefferies has downgraded its rating on LyondellBasell from “Buy” to “Hold” on rising US recession risk, as well as the US shale thesis being “played out”, said Fintel.
“With OPEC’s production cut and US natural gas testing around USD2/MMBtu, the US shale advantage thesis has played out," Jefferies analyst Laurence Alexander said in a research note. "A US recession in H2 2023-2024, in contrast, still presents significant risk to sentiment as it will likely trigger another round of destocking and margin erosion.”
While near-term trends are encouraging – specifically strong refining margins, stable propylene spreads and polyethylene (PE) benefitting from competitor force majeures, capacity expansion delays and higher oil prices, which support US olefins margins, demand risks are rising, he pointed out. “We expect the key risks in H2 2023-2024 to be increasing pressure on US consumers as the US economy slides into recession,” Alexander said.
“We expect the recession to last 4-6 quarters, with the first step-up in the unemployment rate likely triggering another round of inventory destocking in retail channels,” he added. The analyst estimates that each 1% cut to global GDP represents a USD250-300m headwind to LyondellBasell’s earnings before interest, tax, depreciation and amortisation (EBITDA) due to compressing spreads.
In a more severe recession, naphtha usually dislocates from oil prices, most likely creating another USD650-750m headwind to EBITDA, he pointed out. In this situation with markedly lower naphtha feedstock prices benefitting its competitors, LyondellBasell’s US cost advantage based on natural gas would erode.
We remind, LyondellBasell NV said it was exploring strategic options for its U.S. Gulf Coast-based ethylene oxide & derivatives (EO&D) business. The company said it was analyzing the potential to retrofit the Houston refinery to build up its Circular and Low Carbon Solutions (CLCS) business.
mrchub.com