LyondellBasell gets to buy from Sasol 50% of cracker, two PE plants at two-thirds of value
LyondellBasell left aside the financial caution it adhered to since the start of the pandemic to seize an opportunity provided by deteriorated market conditions to buy for two-thirds of the estimated real value a 50% stake in an ethane cracker and two polyethylene plants in Louisiana from Sasol.
The purchase includes half of Sasol’s 1.5 MM ton/year ethane cracker and 0.9 MM ton/year low density (LDPE) and linear-low density (LLDPE) polyethylene (PE) plants.
The assets were part of a Sasol expansion at Lake Charles marked by delays and cost overruns. LyondellBassel will now run the assets and market all products on behalf of both partners.
LyondellBasell got “full capacity and immediate financial benefits of a new, operational, world-scale integrated cracker complex with minimal exposure to risk of project execution, timing uncertainty and opportunity cost typically incurred during the multi-year construction,” LyondellBasell’s CEO Bhavesh Patel said.
The assets also represented for LyondellBasell “a very attractive valuation” as the transaction timing occurred as the market reached a bottom, Patel added in comments during an Oct. 2 call conference with analysts.
The announcement came six months into the Covid pandemic, which has clouded the demand outlook and impacted the U.S. feedstock cost advantage.
The entire Lake Charles expansion, which included other production assets, suffered cost overruns and ended up having a cost of nearly $13 billion. Back in 2014 Sasol had estimated construction would take about four years and cost under $9 billion.
The LDPE startup was delayed by an explosion in January and then by Hurricane Laura after late August.
Sasol will continue to own at Lake Charles 100% of its research and development unit, the East Plant ethane cracker and performance chemicals assets that produce Ziegler alcohols and alumina, ethoxylates, Guerbet alcohols, paraffins, co-monomers, linear alkyl benzene, ethylene oxide and ethylene glycol.
Paying two-thirds of the value
Based not on what Sasol shelled out in a construction plagued with significant cost overruns, but on what the cost would be to build similar assets today in a well-managed construction, Patel estimated LyondellBasell is getting the assets for two-thirds of their value.
“My sense is that a really well executed project that is low cost relatively speaking, including the utility and the infrastructure, would likely be close to $6 billion for a well-executed project, 100% basis, so half of it would be about $3 billion,” Patel said.
“I do think that we’re kind of at the bottom of the polyethylene cycle and there have been many public announcements about the delay or cancelation of projects on the supply side and on the demand side,” Patel said.
Looking ahead, Patel believes the PE market will recover and allow LyondellBasell to see cash flow reflected in earnings per share by next year. The companies will complete the transaction by year’s end.
LyondellBasell seizes an opportunity
“We think the cycle should turn up here,” Patel said.
“I’m not implying here that we get back to 2014 kind of margins, but I think getting to the past three years 17, 18, 19 over the next three to five years is doable,” he added.
“If you look at how PE demand has developed here during the pandemic, we actually see year-over-year demand growth globally, we see year-over-year demand growth in the U.S.,” he added.
Patel said he recognized the purchase “may come as a surprise after a strategy of limiting financial exposure in the first six months of the pandemic.”
“The key here is that you pay or have valuations at the bottom of the cycle,” he added.
“I’ve been through a lot of cycles over the 30 plus years that I’ve been in the business and this is kind of how cycles work,” Patel said.
LDPE, LLDPE to compliment production
Patel said he expects the purchase will result in an “unlevered internal rate of return in the mid-teens.” The company will pay for the assets with debt and cash. It does not have plans engage in asset construction or additional new purchases.
“We don’t see any other assets that are like this, that have the strategic rationale that I laid out, so our focus now is going to be to get to closing as quickly as possible, get the rates to where we want, get a solid marketing plan in place,” he said
The joint venture’s LDPE and LLDPE capacity will complement LyondellBassell existing North American capacity, which is predominantly high density (HDPE), he said.
LyondellBassel production will reach over 17 MM tons of annual olefin capacity and 16 MM tons of polyolefin capacity after the transaction, he said. Assets include 13 ethylene plants and dozens of PE production lines.
Long in ethylene
“After the start of our hyperzone plant we’re about 500,000 tons long before this deal so if you add another 300,000 we end up in the 800,000 which gets us to under 2 billion” pounds of ethylene in the U.S., he said.
“We’ve been kind of in the 1 to 2 (billion pounds long) range for a few years now and I don’t think that’s too long,” he said.
“We have a very extensive pipeline network, many longstanding relationships. Sasol is selling some of that ethylene today so I think it’s still modest,” he added.
As for whether LyondellBasell could acquire or build ethylene derivative units to balance ethylene output and requirements, Patel left the possibility open only for the longer term.
“That would be a middle of the decade or second half of the decade sort of decision,” he said.
As for Sasol, “what I hope our partners saw was the value that we brought from an operating standpoint, the ability to plug in to a global network on marketing immediately from day one, and the possibility for them to retain 50% and ride some of the market upside before they make a decision on the second 50%,” Patel said.
By Renzo Pipoli
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