Fitch Ratings has affirmed the Long- and Short-Term Issuer Default Ratings of 'BBB'/'F2' on LyondellBasell Industries N.V. (Lyondell; NYSE: LYB).

Fitch has also affirmed the 'BBB' rating of Lyondell's and its subsidiaries' senior unsecured debt and 'F2' rating of the company's CP program. The Rating Outlook is Positive.

The ratings reflect Lyondell's significant scale and diversification, feedstock flexibility, consistently strong pre-dividend cash flow generation, and balanced capital allocation plan that supports its investment-grade financial profile. The Positive Outlook considers the company's recent debt reduction efforts, anticipated continued positive FCF and an expectation that the company's leverage will fall below the positive sensitivities during the forecast horizon. Fitch expects that LyondellBasell will maintain moderate leverage well inside our negative sensitivities for 2023 despite global macroeconomic headwinds.

Key Rating Drivers

Macro Weakness Supported by Solid Cash Flow and Liquidity: Fitch expects that Lyondell will maintain robust FCF and liquidity in 2023 despite weakness in Europe, a drop in housing activity in the U.S. and an evolving situation in China. In the face of these uncertainties, we expect that Lyondell will generate over $1.5 billion in FCF (after dividends) in 2023 and maintain liquidity in excess of $5 billion, as the company's operations are supported by exposure to a range of diverse end markets across autos, packaging and consumer products.

Scale, Natural Gas and Feedstock Advantage: Lyondell benefits as the third largest chemical company globally, after BASF and Dow, with strong end-market and geographic diversification which supports consistently strong cash flows and helps moderate the earnings impact on the credit profile. Furthermore, the company benefits from access to advantaged natural gas-based feedstocks in North America, allowing the company to maintain relatively resilient, through-the-cycle EBITDA margins. Fitch expects that Lyondell's anticipated 2023 start of its new propylene oxide and tertiary butyl alcohol (PO/TBA) plant in Houston will position the company to meet the demand for polyurethanes and high-octane, clean-burning oxyfuels.

Increased Focus on Shareholder Returns: With much of the company's planned capital spending and deleveraging completed, Fitch expects that Lyondell will utilize its FCF - forecasted to be over $5.5 billion through 2025 - for share buybacks and opportunistic M&A or joint venture (JV) investments. Fitch does not anticipate any material debt reductions after 2022. Any material incremental debt issuances or a meaningful deterioration of liquidity resulting from increased share repurchase activity would give rise to a review of the ratings.

Improved Leverage Visibility. Fitch believes that LYB's increasing scale combined with its gross debt targeting improves visibility on leverage through the forecast period. Lyondell's scale increased significantly following the December 2020 completion of its $2 billion JV deal with Sasol, which yielded a 50% stake in the company's Lake Charles, Louisiana chemical complex and added to low-cost LDPE capacity within the advantaged Gulf Coast region.

LYB's portfolio of other investments and its new PO/TBA plant provide incremental capacity and earnings generation. Fitch estimates that as a result of incremental capacity additions, mid-cycle EBITDA will be in the $7.5 billion range during the forecast period, which will result in mid-cycle gross leverage in the 1.6x area based on an 'anchor' level of $12 billion in gross debt.

Planned Refinery Exit. The company's announced intention to shut its Houston refinery, which we incorporate into our forecast, will ultimately reduce capital needs while having a modest through-the-cycle benefit to earnings. Lyondell's refining segment has been an inconsistent EBITDA generator over the past six years and retiring the refining assets will over the long-term reduce Capex needs while also helping the company achieve its sustainability goals. Fitch expects that refinery closure costs of $750 million will largely be supported by crude inventory working capital releases.

Increased Focus on Sustainability. Fitch believes that Lyondell's new Circular and Low Carbon Solutions business unit demonstrates continued focus on providing commercial solutions and materials generated from mechanical and molecular recycling processes and renewable feedstocks. Other initiatives include a potential venture with Air Liquide, Chevron and Uniper to develop a lower carbon hydrogen and ammonia project along the U.S. Gulf Coast, the development of a new plastic waste circularity center in Houston and the establishment of a joint venture with Genox Recycling to build a plastics recycling plant in Guangdong Province, China, among other efforts.

Derivation Summary

LyondellBasell's ratings are supported by the company's position as the third largest chemical company globally, after BASF SE (A/Stable) and Dow Chemical Company (BBB+/Positive), and larger than peers Westlake Chemical Corp (BBB/Positive) and Huntsman Corporation (BBB/Stable).

Lyondell's margin and cash flow risk profile are similar to peers with commodity price exposure, but profitability in the mid-teens is generally higher than Huntsman in the low double-digits given Lyondell's considerable scale and favorable cost position. Dow typically generates slightly higher margins than Lyondell given its lower polymers exposure and higher value-add exposure, while polymers-oriented Westlake generally sees more margin volatility. Lyondell's feedstock-advantaged North American plants provide it with better margins than its much larger peer BASF SE.

Key Assumptions

Key Ratings Case Assumptions:

Drop in sales in 2023 driven by recessionary conditions and a more severe drop in Europe. Fitch assumes that the European O&P business is modestly EBITDA-negative in 2023. Revenue declines in 2024 driven by Lyondell's announced refining exit;

EBITDA margin compression driven by lower capacity utilization, partially offset by some easing of raw materials cost pressures. Fitch expects margins to trough in 3Q23, with subsequent improvements into 2024. Margins also benefit from a mix shift away from refining;

Benefits from Lyondell's PO/TBA expansion build into 2024;

Benefits from Lyondell's announced $750 million value-enhancement program layered in over time through 2026;

Dividends of $1.5 billion to $1.7 billion annually, excluding any special payouts;

Capex forecasted at 4-5% of revenue.

Fitch assumes no additional M&A or JV investments. Lyondell allocates its FCF to share buybacks over the projection period. Any incremental M&A or investments would be funded through FCF and balanced against share buybacks.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Demonstrated robust earnings resiliency, leading to midcycle EBITDA leverage sustained below 2.0x;

Continued track record of balanced capital allocation, including moderately sized M&A and linkage of shareholder activity to cash flows.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Midcycle EBITDA leverage sustained above 2.5x;

Deviation from financial policy where shareholder distributions are prioritized over maintenance of gross debt levels, or large transformational M&A activity where there is no clear path to deleveraging;

A sustained downward trend in EBITDA margins signaling a structurally weaker polymers market or failure to innovate and compete in core end-markets, resulting in an erosion of the company's leading market position.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

LyondellBasell's liquidity is ample. As of Sept. 30, 2022, Lyondell reported approximately $1.5 billion in cash, and had $2.95 billion of borrowing capacity under its multi-currency revolving credit facility (November 2026 maturity) plus an additional $900 million of availability under its U.S. receivables liquidity facility. Debt maturities are well-laddered and modest over the forecast period and can be supported through FCF or excess liquidity, or both, should Lyondell choose not to or be unable to refinance its debt.

Issuer Profile

LyondellBasell (LYB) is one of the leading plastics, chemicals and refining companies in the world, behind BASF and Dow Chemicals. The Dutch headquartered company is a global manufacturing leader of olefins and polyethylene and the second largest supplier of polypropylene in the world. It also refines high-sulfur crude oil and licenses technologically advanced chemical and polyolefin processes. Primary industries served included food packaging, home furnishings, automotive and paints and coatings.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

(C) 2023 Electronic News Publishing, source ENP Newswire