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01/21/2014 7:00 am EST
Oil and gas companies' overzealous production of natural gas, and natural gas liquids, has restored the fortunes of domestic chemical producers, an energy-intensive industry that relies on these commodities to generate power, and as feedstock, explains Peter Staas, editor of Capitalist Times.
Within this space, olefin producers have benefited the most from trends in the energy patch. The two most prominent olefins, ethylene and propylene, serve as the basic building blocks for three-quarters of all chemicals, plastics, and synthetic fibers.
Not only do shares of well-positioned US olefin producers stand to benefit from depressed ethane prices and near-term investments in capacity expansions, but, more importantly, the group also enjoys a substantial cost advantage over peers with production facilities in Asia and Europe.
Holland-based petrochemical outfit LyondellBasell Industries (LYB) remains the best bet for income-seeking investors to profit from persistently weak ethane prices in North America.
About 80% of the company's annual earnings, before interest, taxes, interest, depreciation, and amortization (EBITDA), come from business lines that benefit from favorable NGL and natural gas prices in the US.
Ethane prices plummeted by 70% in 2012. A 28% rally in 2013 reflected a seasonal recovery in natural gas prices. But regardless of this recent uptrend, the US ethane market should remain oversupplied for, at least, the next three years.
We also expect LyondellBasell Industries' intermediates and derivatives business to benefit from strong profit margins on its oxygenated fuel products, a business where profit margins have grown significantly, because of elevated oil prices and the depressed price of natural gas in North America.
Europe's strengthening economy will also provide a tailwind to these operations, while the firm's refinery on the Gulf Coast stands to benefit from the increasing availability of discounted heavy crude oil from Canada's oil sands—an upside catalyst that will likely occur toward the end of 2014.
The temporary updraft in ethane prices in the fourth quarter, coupled with an explosion at the company's Gulf Coast refinery, could give investors a limited opportunity to buy this name on a pullback. Don't pass it up.
With an improving growth outlook and a solid track record of dividend increases and share repurchases, LyondellBasell Industries rates a buy up to $82 per share.
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