In front of the boom
Savvy decisions at the right time strengthen petrochemical giant LyondellBasell’s hand
TEN years ago, Lyondell Chemical was targeted by a Soviet-born billionaire willing to vastly overpay for it as he sought to create a global petrochemical giant by merging the Houston chemical maker with his own company in Europe.
The $13 billion deal left the combined company, Lyondell Basell Industries, burdened with debt just as a worsening U.S. financial crisis plunged the global economy into a deep recession. Bankruptcy followed in 2009. Plants closed, thousands of workers lost jobs and shareholders were all but wiped out, prompting plenty of outrage and lawsuits.
To put it mildly, said Hassan Ahmed, a chemical industry analyst, “It didn’t seem like the best deal.”
Fast-forward to today, and Lyondell Basell, which emerged from bankruptcy in 2010, is growing rapidly, spending billions to expand its production along the Gulf Coast and its markets around the world. The company’s stock market valuation has roughly doubled in five years to $40 billion, making Lyondell Basell the nation’s second-largest chemical company behind only the recently merged Dow DuPont of Midland, Mich., and Wilmington, Del.
The turnaround, analysts say, is the result of a management team that guided the company out of bankruptcy, trimmed costs and methodically built on its Texas operations, positioning Lyondell Basell to ride a shale drilling boom that provided plentiful and cheap supplies of natural gas, the feedstock for chemicals and plastics. The company first focused on quickly expanding plants in Channelview, La Porte, Victoria and Corpus Christi, requiring modest investments that didn’t saddle the company with much debt.
As profits have grown into the billions each year— the company on Friday reported a $1.1 billion profit in the third quarter — so have Lyondell Basell’s ambitions. Construction recently began on a $700 million plant in La Porte to make stronger, thinner plastics to serve growing Asian markets. A $2.4 billion chemicals complex in Channelview and Pasadena, the company’s most expensive project ever, was given the green light this summer.
Last week, CEO Bob Patel said he plans to follow that project with another a $2 billion-plus plant, which would use propane, a byproduct of natural gas processing, to make chemicals and the plastic polypropylene for North and South American markets.
“They’ve done a phenomenal job,” said Ahmed, who follows the chemical industry for the New York financial research firm Alembic Global Advisers. “They didn’t want to do anything too spectacular, and they made sure the ship was steady. That’s worked extremely well for them.”
Lyondell Basell counts about 13,000 employees worldwide, including 4,800 in greater Houston, where about 1,000 work in the global headquarters downtown.
The company has roots in two continents. Lyondell was spun out from the oil company Atlantic Richfield Co., or ARCO, almost 30 years ago. The Dutch chemical maker Basell was formed as a joint venture between Royal Dutch Shell and German multinational BASF.
The Soviet-born billionaire Len Blavatnik (who still controls about 15 percent of the company) acquired Basell in 2005, before gobbling Lyondell in 2007. Patel, then an executive at Chevron Phillips Chemical Co., followed the merger at a distance, recalling it as a difficult and heavily debt-financed deal that didn’t
“At the time I was very nervous about joining a bankrupt company, but I believed in the scope of the company and the potential.” Bob Patel, LyondellBasell CEO
After the bankruptcy filing, Jim Gallogly, a veteran of ConocoPhillips and Chevron Phillips, was hired as CEO. He brought in Patel as a senior vice president in early 2010, right before LyondellBasell emerged from bankruptcy. Patel took the reins in the beginning of 2015 when Gallogly retired.
Gallogly and Patel faced tough choices as they worked to rebuild the company, closing about 10 plants and slashing almost 5,000 employee and contractor jobs, especially in Europe. With fewer global plants in operation and fewer people on the payroll, the company focused on making its remaining operations more efficient and profitable.
Unlike the merger, the timing of the reorganization could not have been better. The shale boom was kicking in, producing vast quantities of the natural gas liquid ethane, which is the feedstock for the primary building block of most plastics, ethylene.
The executives opted to expand their Texas plants to churn out more ethylene and completed those projects much faster than competitors, who were building facilities from scratch.
“When the combination occurred, shale gas wasn’t really visible yet,” Patel said. “In hindsight, it’s turned out to be an incredible deal because of the additional tailwinds from shale gas.”
LyondellBasell has become a major player in Gulf Coast’s petrochemical boom, fueled not only by the flood of natural gas, but also access to foreign markets through growing export terminals at the Port of Houston and other Texas ports. The American Chemistry Council, a trade group, estimated the Texas Gulf Coast accounts for about $70 billion of the $185 billion in petrochemical plants completed since 2010 or planned through 2023. Still hungry
Even though the company is thriving, Patel wants to inject a new sense of urgency to coincide with the 10-year anniversary of the merger. He hopes to re-create the same “hunger and enthusiasm” that permeated the organization when the company was still fighting for its life, determined to prove to doubters that it could prosper in a competitive global industry dominated by large players such as Dow, DuPont and BASF.
“That’s not easy to do,” Patel said. “You want to have that drive and hunger, but you don’t want people to feel fearful.”
The $2.4 billion expansion that will span locations in Channelview and Pasadena is scheduled to break ground in the spring. The plant will make propylene oxide, which is used to make bedding, carpeting, coatings, building materials and adhesives, and the by-product tertiary butyl alcohol, which is refined into an additive that makes fuels burn cleaner. The plant will have the biggest production capacity in the world for these chemicals, capable of manufacturing 1 billion pounds of propylene oxide and 2.2 billion pounds of tertiary butyl alcohol a year.
The planned $2 billion project that Patel recently disclosed would likely get built on the Texas Gulf Coast, but a final decision on the investment may not come until the end of 2018. It could also be one of the company’s last megaprojects here, Patel said.
The low prices of oil, another petrochemical feedstock used by foreign competitors, is eroding the cost advantages of natural gas-based chemicals. Local construction costs also are rising as tighter commodity and labor markets make materials and workers — especially those in skilled trades such as welding — more expensive. Soon, Patel said, LyondellBasell may again look internationally to grow.
“The U.S. still has an advantage, but it’s not as great as it was,” Patel said. “So I think that’s likely going to dampen the amount of expansion in the future. It’ll be a more paced investment.” email@example.com twitter.com/jdblum23
Chief executive Bob Patel wants to re-create the “hunger and enthusiasm” that helped LyondellBasell succeed in the years after the merger. “That’s not easy to do,” Patel says. “You want to have that drive and hunger, but you don’t want people to feel fearful.”
LyondellBasell is starting construction on a $700 million plastics plant at its existing petrochemical hub in La Porte.