Daily Chemical Reactions | Sunday Thematic & Weekly Recap

Will Share Buybacks Be The Least Risky Use Of Cash in 2024?
February 25, 2024
Commodities Mentioned:
Ammonia, Power, Natural Gas, LNG, NGLs, Ethylene, Polyethylene, Hydrogen
Companies Mentioned:
LyondellBasell, Ørsted, BASF, Huntsman, Bloom Energy

C-MACC Sunday Thematic and Weekly Recap

Will Share Buybacks Be The Least Risky Use Of Cash in 2024?

  • The investment landscape for 2024 is looking very cloudy, with uncertain economic growth, uncertain election outcomes, unclear regulations, and escalating costs of decarbonization – buybacks may appease everyone.
  • Investors unhappy with environmental progress may be forgiving if their returns rise, either through special dividends or buybacks – recall the explosive performance from LyondellBasell in the early 2010s.
  • Plowing ahead with capital investments that will likely drive lower returns because of escalating costs seems stubborn and inflexible. Consequently, we would expect more redeployment of cash as the year progresses.
  • The challenge with buybacks today is that stocks are generally not that cheap, and should we see a correction in the market in 2024, you could be buying back today at a premium to prices later – but this is always a risk.
  • Otherwise, we study the history of US ammonia to comment on how pricing may move, question whether we should be shutting any power plants, and ask what will happen to sustainability promises without power.
  • Companies Mentioned: LyondellBasell, Ørsted, BASF, Huntsman, Bloom Energy
  • Products Mentioned: Ammonia, Power, Natural Gas, LNG, NGLs, Ethylene, Polyethylene, Hydrogen

Exhibit 1: LyondellBasell performed the best when cash return to shareholders was high and expected to continue – see the following two exhibits: as investments increased, the share price stagnated.

Source: Capital IQ, C-MACC Analysis, February 2024

Even when you are not in uncertain times, buying back a lot of stock and paying special dividends is not a bad idea. As you look at the series of LyondellBasell charts here, there is an implied correlation between returning cash to shareholders and performance. That said, deleveraging played a large part in the early LyondellBasell story, as did certainty – the company was very clear about buying back stock and paying dividends and then executed on that promise. Buybacks and dividend increases are more valuable in the eyes of investors if they can be relied on, and note how buybacks dropped for LyondellBasell, especially since 2019 as the company went on a new build and acquisition spending spree. The underperformance in the stock since 2014 is even more pronounced at a market cap level when you consider that the company has repurchased over 30% of its outstanding shares on a net basis since 2014. In today’s market, we have economic growth uncertainty, and no one is expecting a strong rebound, we have chronic overcapacity in many products, and we have the rising cost of decarbonization, which suggests that these initiatives are not profitable and should be delayed. Many companies would be well served today, with explicit statements about reigning in spending – everywhere – including energy transition – and pushing a consistent share buyback and dividend story. This is especially true for companies with a large North American footprint, benefiting from the windfall profits from cheap natural gas.

See PDF below for all charts, tables and diagrams


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