Could or Should Aramco Buy Lyondell?

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Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

November 21st, 2016

Could or Should Aramco Buy Lyondell?

  • Today’s article on Aramco in the WSJ, coincides with some follow-up work that we are engaged in supporting our recent ethylene research and more positive stance on Lyondell.
    • Our fundamental stance is that the global ethylene/polyethylene market is in better shape in 2017 and 2018 than is generally believed, given likely demand growth relative to capacity additions.
    • LYB is very cheap given leverage to the ethylene/polyethylene cycle; the US natural gas advantage gives sufficient cyclical trough earnings to support the dividend.
    • Why would Aramco see LYB any differently?
  • According to today’s WSJ article (11/21/2016) Aramco wants to expand into chemicals in part to diversify and in part to use more of its oil or oil fractions captively.
    • While the LYB US chemical assets are mostly fed from the bountiful US NGL pool, LYB has substantial naphtha based assets in Europe – could be supplied captively.
    • LYB brings technology licensing, downstream polypropylene compounding and a very strong polyurethane feedstock business – things Aramco does not have today.
  • LYB has been quite public about the sale of its refinery and it would be highly likely that Aramco is looking at the asset. The refining dialogue could extend to a whole company dialogue in the same way that Dow and DuPont’s Ag discussion evolved.
    • Aramco could spin out its chem assets into a JV – while paying LYB holders for control.
    • Or Aramco could buy the company outright for cash.
  • If Aramco were to pay $120 per share cash for LYB – 60% of likely incremental interest costs would be covered by the saved dividend expense.
    • While a Dow (materials) /Aramco fit might look just as good on paper today – maybe better given the existing Sadara relationship – Dow is not available today and may not be split into its expected constituent parts for years. LYB is available now.
    • A deal with LYB today would not prohibit a deal with Dow Materials later – the ethylene/polyethylene market remains fragmented – see research.
  • We have no idea whether LYB is a seller or whether Aramco would be interested in buying something this big, but the industrial logic is there – certainly for Aramco.

Exhibit 1

Source: Capital IQ, SSR Analysis

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