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Lyondell derives 50% of its profit from its US segment of olefins and polyolefins.

Thanks to the booming production of natural gas liquids (NGLs) in the US, the production cost of Lyondell has been reduced by more than 50% in the last two years.

At the same time, the selling price of its products has remained essentially flat. This has resulted in record earnings for the company.

Given the low P/E, the above growth coupled with the aggressive share buyback program that will eliminate 10% of outstanding shares in 12 months is very promising for the stock.

LyondellBasell (NYSE:LYB) is one of the world's largest producers of plastics and chemicals that are used in almost every human activity, such as packaging, electronics, automotive parts and construction materials. Although institutional ownership of this company is high (81%), analysts rarely care to upgrade or downgrade the stock so it somewhat passes under the radar of most investors.

Lyondell earns 50% of its profit from its US segment of olefins and polyolefins. This segment has exhibited exceptional growth in the last few years thanks to the booming production of natural gas liquids (NYSE:NGLS) in the US. The company has sufficient flexibility to change the input of raw materials in its production, with the booming production of NGLs in the US favoring their maximum use in the production. To be sure, the use of NGLs has reduced the cost of ethylene production of Lyondell more than 50%, from 0.356 $/lb in 2011 to 0.162 $/lb in 2013. Even better, while the production cost has more than halved, the price of the products has remained fairly constant, thus greatly boosting the margins of the company. As the burgeoning production of NGLs in the US has no end in the near future, the margins of the company are expected to keep thriving for the next few years.

Moreover, the company has some ongoing expansion projects that will be completed in 2015. These projects are expected to increase EBITDA by almost 20%, according to the management. A 20% increase in EBITDA will raise the net income by more than 20% but a conservative investor can assume that the growth projects will boost the net income by about 20%.

Furthermore, the company initiated an aggressive share buyback program last year, which is actively executed this year too. The company repurchased 10% of its shares in the last 12 months and is on its way to repurchase another 10% in the next 12 months. As the shares are repurchased at a low P/E of about 14, the buyback program is very efficient in creating shareholder value.

The 10% reduction in the number of shares coupled with a 20% earnings growth will result in growth of earnings per share (EPS) of about 30%. As the stock currently trades at a reasonable P/E of 14, it is reasonable to expect the stock to appreciate by about 30% in the next year. However, in order to be conservative with a wide safety margin, investors can set their target price to just 20% from the current level, i.e., at $135.

The only risk for Lyondell is the fact that it operates in a commodity business, which is highly cyclical and cannot have extremely high margins for many years. Competitors will attempt to enter the very profitable market of olefins and polyolefins but, fortunately for the company, these investment projects tend to last 3-5 years so the company is not expected to face serious competition at least till 2017. We witnessed the same situation in the refinery sector, which enjoyed extremely high margins in the years 2004-2006. Those record profits resulted in several investment projects for new refineries, which started operating in 2009-2011, thus causing refinery margins to pronouncedly shrink, ultimately resulting in the closure of about 20% of global refining capacity.

In the case of the chemical sector of Lyondell, as the company has invested in high-complexity production units and its capital expenses have already declined thanks to its prompt investment in the sector years ago, Lyondell will be the low-cost producer even when competition emerges so it will still have an edge, though its margins will be pressured. Even when competition shows up, it will have a visible effect on the earnings of Lyondell only one year later, as Lyondell hedges the margin of a significant portion of its production at favorable prices.

To sum up, I expect Lyondell to achieve EPS $9.15 next year (analysts' consensus) and at least $10 in 2016 thanks to its expansion projects and its aggressive share repurchases. Therefore, I expect the stock to appreciate to at least 15 times its next year's earnings in the next 12 months, which will imply a stock price of about $135. A word of caution here: as mentioned above, the company operates in a highly cyclical commodity business and hence I do not recommend this stock as a buy-and-hold-forever stock. As soon as the stock reaches its target of $135 in 12 months or slightly lower but sooner, investors are advised to take the profit.